UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934]
For the Fiscal Year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ________________ to ________________________
Commission File Number 0-11771
SJNB Financial Corp.
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(Exact name of registrant as specified in its charter)
California 77-0058227
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NORTH MARKET STREET, SAN JOSE, CALIFORNIA 95113
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (408) 947-7562
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value
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(Title of class)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on a market value of $35.00 per share
(the closing price of the Common Stock, as of March 3, 1998) was $69,257,000.
Number of shares of common stock outstanding as of March 3, 1998: 2,516,558
Documents incorporated by reference:
Portions of registrant's definitive proxy statement for registrant's 1997 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A) are
incorporated by reference into Part III of this Report.
<PAGE>
TABLE OF CONTENTS
PART I
Page
Item 1 - Business 1
Item 2 - Properties 9
Item 3 - Legal Proceedings 10
Item 4 - Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder
Matters 11
Item 6- Selected Financial Data 12
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A- Quantitative and Qualitative Disclosures about Market Risk 30
Item 8 - Financial Statements and Supplementary Data 31
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 52
PART III
Item 10 - Directors and Executive Officers of the Registrant 52
Item 11 - Executive Compensation 52
Item 12 - Security Ownership of Certain Beneficial Owners and Management 52
Item 13 - Certain Relationships and Related Transactions 52
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 52
Signatures 58
<PAGE>
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K includes forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking statements (which
do not involve the historical or financial statement information herein) involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry; changes in the interest rate
environment; general economic conditions, either nationally or regionally, are
less favorable than expected, resulting in, among other things, a deterioration
in credit quality and an increase in the provision for possible loan losses;
changes in the regulatory environment; changes in business conditions,
particularly in Santa Clara County and in the semiconductor industry; certain
operational risks involving data processing systems or fraud; volatility of rate
sensitive deposits; asset/liability matching risks and liquidity risks; risks
associated with the Year 2000; and changes in the securities markets. See also
the section included herein entitled "Year 2000" and "Certain Additional
Business Risks" and other risk factors discussed elsewhere in this Report.
General
SJNB Financial Corp. ("Company") is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company was
incorporated under the laws of the State of California on April 18, 1983. Its
principal office is located at One North Market Street, San Jose, California
95113 and its telephone number is (408) 947-7562.
The Company owns 100% of the issued and outstanding common shares of San Jose
National Bank (referred to herein as "SJNB" or "the Bank"). The Bank was
incorporated on November 23, 1981 and commenced business in San Jose,
California, on June 10, 1982. The Company acquired Business Bancorp ("BB") and
its wholly-owned subsidiary California Business Bank ("CBB") on October 1, 1994.
Operations of the Company and BB were consolidated into a single location at One
North Market Street, San Jose, California 95113. SJNB engages in the general
commercial banking business with special emphasis on the banking needs of the
business and professional communities in San Jose and the surrounding areas.
On January 2, 1996, the Bank acquired Astra Financial Corp. for approximately
$760,000. Its business was merged into the Bank's Financial Services Division,
by adding approximately $1.9 million of factored receivables. Astra Financial
Corp. was liquidated on January 5, 1996, and its assets were transferred to the
Bank. The Bank's Financial Services Division is located at 95 South Market
Street, San Jose, California 95113.
SJNB accepts checking and savings deposits, offers money market deposit accounts
and certificates of deposit, makes secured and unsecured commercial and other
installment and term loans, and offers other customary banking services. SJNB
offers banking services generally, but it places primary emphasis on lending for
real estate purposes and specialized lending to businesses and professionals.
Loans for real estate purposes include term financing for commercial facilities
and real estate construction loans mainly for residential and commercial
properties. Loans to businesses and professionals include accounts receivable
financing, equipment financing, commercial loans, SBA loans, and letters of
credit. In addition, the Bank offers factoring services through its Financial
Services Division. Although the Bank has neither a trust nor an international
banking department, it has arranged to provide these services through its
correspondent banks.
The Company provides commercial banking services principally through the Bank
and the Bank's Financial Services Division. As a bank holding company, the
Company is authorized to engage in the activities permitted under the BHCA and
regulations thereunder.
Year 2000
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed an implementation plan designed to resolve the issue. The Year 2000
problem arises because many software programs were written using two digits
rather than four to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize the two-digit date "00" as being
the year 1900 rather then the year 2000. This could result in a major system
failure or miscalculations.
The Company plans to utilize both internal and external resources to attempt to
identify, correct or replace, and test its systems for the Year 2000 compliance.
It is anticipated that all corrective action and testing of key systems will be
completed by December 31, 1998. The Company has recently converted the Bank's
main data processing system. The vendor has stated that the software is Year
2000 compliant. Confirmations from the Bank's other vendors have been requested
as to their plans for being Year 2000 compliant.
The Bank presently believes that, with modifications to existing software and/or
the conversion to new software which is Year 2000 compliant, the Year 2000
problem should not pose significant operational problems for the Company's
computer systems as so modified and converted. The Company is expensing all
period costs associated with the Year 2000 problem. To date, the amount of such
expense has not been significant. It is estimated that the Bank will incur
approximately $100,000 for the identification, correction and reprogramming, and
testing of systems for Year 2000 compliance during 1998 and 1999.
Other significant risks relating to the Year 2000 problem are that of the
unknown impact of this problem on the operations of the Bank's customers and
actions which banking regulators may take. The Bank is making efforts to ensure
that its customer base is aware of the Year 2000 problem. In addition to
seminars for and mailings to its customer base, the Bank has amended its Credit
Policy and credit authorization documentation to include consideration regarding
the Year 2000 problem. It is not possible to predict the effect of this problem
on the economic viability of its customers and the related impact it may have on
the level of the Bank's provision for possible loan losses in future periods.
Service Area
The principal service area of SJNB includes the County of Santa Clara and its
contiguous counties, including San Mateo, Alameda, Contra Costa, Santa Cruz and
San Benito.
Employees
At December 31, 1997, SJNB had 68 full-time officers and employees and 16
part-time employees for a total of 77.5 employees on a full-time equivalent
basis. Certain of the Bank's officers are also officers of the Company. None of
the Bank's employees are represented by a union. Management believes that
employee relations are good.
Supervision and Regulation
The Effect of Government Policy on Banking
The earnings and growth of the Company are affected not only by local market
area factors and general economic conditions, but also by government monetary
and fiscal policies. For example, the Board of Governors of the Federal Reserve
System ("FRB") influences the supply of money through its open market operations
in U.S. Government securities and adjustments to the discount rates applicable
to borrowings by depository institutions and others. Such actions influence the
growth of loans, investments and deposits and also affect interest rates charged
on loans and paid on deposits. The nature and impact of future changes in such
policies on the business and earnings of the Company cannot be predicted.
Additionally, state and federal tax policies can impact banking organizations.
Applicable California bank and corporation tax rates were recently reduced by 5%
in order to keep California competitive with other western states.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of the Company is particularly susceptible to
being affected by the enactment of federal and state legislation which may
increase or decrease the cost of doing business, modify permissible activities
or enhance the competitive position of other financial institutions. Any change
in applicable laws or regulations may have a material adverse effect on the
business and prospects of the Company.
Regulation and Supervision of Bank Holding Companies
The Company is a bank holding company subject to the Bank Holding Company Act of
1956, as amended ("BHCA"). The Company reports to, registers with, and may be
examined by, the FRB. The FRB also has the authority to examine the Company's
subsidiaries. The cost of any examination by the FRB are payable by the Company.
The Company is a bank holding company within the meaning of Section 3700 of the
California Financial Code. As such the Company and the Bank are subject to
examination by, and may be required to file reports with, the California
Commissioner of Financial Institutions (the "Commissioner").
The FRB has significant supervisory and regulatory authority over the Company
and its affiliates. The FRB requires the Company to maintain certain levels of
capital. See "Capital Standards." The FRB also has the authority to take
enforcement action against any bank holding company that commits any unsafe or
unsound practice, or violates certain laws, regulations or conditions imposed in
writing by the FRB. See "Prompt Corrective Action and Other Enforcement
Mechanisms."
Under the BHCA, a company generally must obtain prior approval of the FRB before
it exercises a controlling influence over a bank, or acquires directly or
indirectly, more than 5% of the voting shares or substantially all of the assets
of any bank or bank holding company. Thus, the Company is required to obtain
prior approval of the FRB before it acquires, merges or consolidates with any
bank or bank holding company. Any company seeking to acquire, merge or
consolidate with the Company also would be required to obtain approval of the
FRB.
The Company is generally prohibited under the BHCA from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than banking, managing banks, or providing services to affiliates of the
holding company. A bank holding company, with the approval of the FRB, may
engage, or acquire the voting shares of companies engaged, in activities that
the FRB has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. A bank holding company
must demonstrate that the benefits to the public of the proposed activity will
outweigh the possible adverse effects associated with such activity.
A bank holding company may acquire banks in states other than its home state
without regard to the permissibility of such acquisitions under state law, but
subject to any state requirement that the bank has been organized and operating
for a minimum period of time, not to exceed five years, and the requirement that
the bank holding company, prior to or following the proposed acquisition,
controls no more than 10% of the total amount of deposits of insured depository
institutions in the United States and no more than 30% of such deposits in that
state (or such lesser or greater amount set by state law). Banks may also merge
across states lines, therefore creating interstate branches. Furthermore, a bank
is now able to open new branches in a state in which it does not already have
banking operations, if the laws of such state permit such de novo branching.
Under California law, (a) out-of-state banks that wish to establish a California
branch office to conduct core banking business must first acquire an existing 5
year old California bank or industrial loan company by merger or purchase; (b)
California state-chartered banks are empowered to conduct various authorized
branch-like activities on an agency basis through affiliated and unaffiliated
insured depository institutions in California and other states and (c) the
Commissioner is authorized to approve an interstate acquisition or merger which
would result in a deposit concentration exceeding 30% if the Commissioner finds
that the transaction is consistent with public convenience and advantage.
However, a state bank chartered in a state other than California may not enter
California by purchasing a California branch office of a California bank or
industrial loan company without purchasing the entire entity or by establishing
a de novo California branch office.
The FRB generally prohibits a bank holding company from declaring or paying a
cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition. See
"Restrictions on Dividends and Other Distributions" for additional restrictions.
Transactions between the Company and the Bank are subject to a number of other
restrictions. FRB policies forbid the payment by bank subsidiaries of management
fees which are unreasonable in amount or exceed the fair market value of the
services rendered (or, if no market exists, actual costs plus a reasonable
profit). Subject to certain limitations, depository institution subsidiaries of
bank holding companies may extend credit to, invest in the securities of,
purchase assets from, or issue a guarantee, acceptance, or letter of credit on
behalf of, an affiliate, provided that the aggregate of such transactions with
affiliates does not exceed 10% of the capital stock and surplus of the
institution, and the aggregate of such transactions with all affiliates does not
exceed 20% of the capital stock and surplus of such institution. The Company may
only borrow from depository institution subsidiaries if the loan is secured by
marketable obligations with a value of a designated amount in excess of the
loan. Further, the Company may not sell a low-quality asset to a depository
institution subsidiary.
The FRB has adopted comprehensive amendments to Regulation Y which became
effective April 21, 1997, and are intended to improve the competitiveness of
bank holding companies by, among other things: (i) expanding the list of
permissible nonbanking activities in which well-run bank holding companies may
engage without prior FRB approval, (ii) streamlining the procedures for well-run
bank holding companies to obtain approval to engage in other nonbanking
activities and (iii) eliminating most of the anti-tying restrictions imposed
upon bank holding companies and their nonbank subsidiaries. Amended Regulation Y
also provides for a streamlined and expedited review process for bank
acquisition proposals submitted by well-run bank holding companies and
eliminates certain duplicative reporting requirements in the event of a further
change in bank control or in bank directors or officers after an earlier
approved change. These changes to Regulation Y are subject to numerous
qualifications, limitations and restrictions. In order for a bank holding
company to qualify as "well-run," both it and the insured depository
institutions that it controls must meet the "well-capitalized" and
"well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank holding company must, on a
consolidated basis: (i) maintain a total risk-based capital ratio of 10% or
greater; (ii) maintain a Tier 1 risk-based capital ratio of 6% or greater; and
(iii) not be subject to any order by the FRB to meet a specified capital level.
Its lead insured depository institution must be well-capitalized as that term is
defined in the capital adequacy regulations of the applicable bank regulator,
80% of the total risk-weighted assets held by its insured depository
institutions must be held by institutions that are well-capitalized, and none of
its insured depository institutions may be undercapitalized.
To qualify as "well-managed:" (i) each of the bank holding company, its lead
depository institution and its depository institutions holding 80% of the total
risk-weighted assets of all its depository institutions at their most recent
examination or review must have received composite, management and compliance
ratings which were at least satisfactory; (ii) none of the bank holding
company's depository institutions may have received one of the two lowest
composite ratings; and (iii) neither the bank holding company nor any of its
depository institutions during the previous 12 months may have been subject to a
formal enforcement order or action.
Bank Regulation and Supervision
As a national bank, the Bank is regulated, supervised and regularly examined by
the Office of the Comptroller of the Currency ("OCC"). Deposit accounts at the
Bank are insured by Bank Insurance Fund ("BIF"), as administered by the Federal
Deposit Insurance Corporation ("FDIC"), to the maximum amount permitted by law.
The Bank is also subject to applicable provisions of California law, insofar as
such provisions are not in conflict with or preempted by federal banking law.
The Bank is a member of the Federal Reserve System, and is also subject to
certain regulations of the FRB dealing primarily with check clearing activities,
establishment of banking reserves, Truth-in-Lending (Regulation Z),
Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B).
The OCC may approve, on a case-by-case basis, the entry of bank operating
subsidiaries into a business incidental to banking, including activities in
which the parent bank is not permitted to engage. A national bank is permitted
to engage in activities approved for a bank holding company through a bank
operating subsidiary, such as acting as an investment or financial advisor,
leasing personal property and providing financial advice to customers. In
general, these activities are permitted only for well-capitalized or adequately
capitalized national banks.
By comparison, California state-chartered banks are regulated by the California
Department of Financial Institutions ("DFI"). The DFI was created pursuant to AB
3351, effective July 1, 1997, and combines the State Banking Department, the
Department of Savings and Loan, and regulatory oversight over industrial loan
companies and credit unions with the DFI.
Capital Standards
The OCC and other federal banking agencies have risk-based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as certain loans.
In determining the capital level the Bank is required to maintain, the OCC does
not, in all respects, follow generally accepted accounting principles ("GAAP")
and has special rules which have the effect of reducing the amount of capital it
will recognize for the purpose of determining the capital adequacy of the Bank.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock, other types
of qualifying preferred stock and minority interests in certain subsidiaries,
less most other intangible assets and other adjustments. Net unrealized losses
on available-for-sale equity securities with readily determinable fair value
must be deducted in determining Tier 1 capital. For Tier 1 capital purposes,
deferred tax assets that can only be realized if an institution earns sufficient
taxable income in the future are limited to the amount that the institution is
expected to realize within one year, or ten percent of Tier 1 capital, whichever
is less. Tier 2 capital may consist of a limited amount of the allowance for
possible loan and lease losses, term preferred stock and other types of
preferred stock not qualifying as Tier 1 capital, term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital are subject to certain other requirements and
limitations of the federal banking agencies. The federal banking agencies
require a minimum ratio of qualifying total capital to risk-adjusted assets and
off balance sheet items of 8%, and a minimum ratio of Tier 1 capital to adjusted
average risk-adjusted assets and off balance sheet items of 4%.
On September 16, 1997, the FDIC adopted a final rule lowering the risk-based
capital requirements for certain small business loans and leases sold with
recourse. The final rule on small business loans and leases sold with recourse
essentially makes permanent an interim interagency rule in effect since 1995
that reduced the minimum capital levels that institutions must maintain for
those transactions. Under the final rule, a qualifying institution that sells
small business loans and leases with recourse must hold capital only against the
amount of recourse retained. In general, a qualifying institution is one that is
well-capitalized under the FDIC's prompt corrective action rules. The amount of
recourse that can receive the preferential capital treatment cannot exceed 15%
of the institution's total risk-based capital.
In addition to the risked-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to adjusted
average total assets, referred to as the leverage capital ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3%. It is improbable, however, that an institution with a
3% leverage ratio would receive the highest rating by the regulators since a
strong capital position is a significant part of the regulators' rating. For all
banking organizations not rated in the highest category, the minimum leverage
ratio must be at least 100 to 200 basis points above the 3% minimum. Thus, the
effective minimum leverage ratio, for all practical purposes, must be at least
4% or 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
<TABLE>
<CAPTION>
The following tables present the capital ratios for the Company and the Bank,
compared to the standards for well-capitalized depository institutions, as of
December 31, 1997 (amounts in thousands except percentage amounts).
(amounts in thousands, except percentages)
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Actual Well Minimum
------------------------------------- Capitalized Capital
The Company Capital Ratio Ratio Requirement
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<S> <C> <C> <C> <C>
Leverage $29,167 9.07% 5.0% 4.0%
Tier 1 Risk-based 29,167 11.28 6.0 4.0
Total Risk- based 32,415 12.53 10.0 8.0
The Bank
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Leverage $28,879 8.97% 5.0% 4.0%
Tier 1 Risk-based 28,879 11.17 6.0 4.0
Total Risk-based 32,126 12.43 10.0 8.0
</TABLE>
Regulators must take into consideration concentrations of credit risk and risks
from non-traditional activities, as well as an institution's ability to manage
those risks, when determining the adequacy of an institution's capital. This
evaluation will be made as a part of the institution's regular safety and
soundness examination. Regulators must also consider interest rate risk (when
the interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in evaluation
of a bank's capital adequacy.
Prompt Corrective Action and Other Enforcement Mechanisms
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more prescribed minimum capital ratios. The law
required each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
Under the prompt corrective action provisions of FDICIA, an insured depository
institution generally will be classified in the following categories based on
the capital measures indicated below:
"Well capitalized" Total risk-based capital of 10%; Tier 1 risk-based
capital of 6%; and Leverage ratio of 5%.
"Adequately capitalized" Total risk-based capital of 8%; Tier 1 risk-based
capital of 4%; and Leverage ratio of 4%.
"Undercapitalized"
Total risk-based capital less than 8%; Tier 1 risk-based capital less
than 4%; or Leverage ratio less than 4%.
"Significantly undercapitalized" Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 3%; or Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or practice warrants such treatment. At each
successive lower capital category, an insured depository institution is subject
to more restrictions.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking organizations could serve as an
additional basis for a regulatory action against the holding company.
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions on transactions and
required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
Federal banking agencies may require an institution to submit to an acceptable
compliance plan as well as the flexibility to pursue other more appropriate or
effective courses of action given the specific circumstances and severity of an
institution's noncompliance with one or more standards.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
The payment of dividends by a national bank is further restricted by additional
provisions of federal law, which prohibit a national bank from declaring a
dividend on its shares of common stock unless its surplus fund exceeds the
amount of its common capital (total outstanding common shares times the par
value per share). Additionally, if losses have at any time been sustained equal
to or exceeding a bank's undivided profits then on hand, no dividend shall be
paid. Moreover, even if a bank's surplus exceeded its common capital and its
undivided profits exceed its losses, the approval of the OCC is required for the
payment of dividends if the total of all dividends declared by a national bank
in any calendar year would exceed the total of its net profits of that year
combined with its retained net profits of the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock. A national bank must consider other business factors in determining the
payment of dividends. The payment of dividends by the Bank is governed by the
Bank's ability to maintain minimum required capital levels and an adequate
allowance for loan losses.
Regulators also have authority to prohibit a depository institution from
engaging in business practices which are considered to be unsafe or unsound,
possibly including payment of dividends or other payments under certain
circumstances even if such payment are not expressly prohibited by statute.
Premiums for Deposit Insurance and Assessments for Examinations
FDICIA established several mechanisms to increase funds to protect deposits
insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is
authorized to borrow up to $30 billion from the United States Treasury; up to
90% of the fair market value of assets of institutions acquired by the FDIC as
receiver from the Federal Financing Bank; and from depository institutions that
are members of the BIF. Any borrowings not repaid by asset sales are to be
repaid through insurance premiums assessed to member institutions. Such premiums
must be sufficient to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also
provides authority for special assessments against insured deposits. No
assurance can be given at this time as to what the future level of premiums will
be.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
Recently Enacted Legislation
The Taxpayer Relief Act of 1997 provides for Education Individual Retirement
Accounts ("Education IRA"), a new type of tax-free savings vehicle to pay
qualified higher education expenses. A maximum of $500 per year may be
contributed to Education IRAs for any beneficiary under the age of 18 years,
provided the contributor has adjusted gross income for the year not exceeding
$95,000 ($150,000 for joint returns). No income tax deduction is provided for a
contribution to an Education IRA. Until a distribution is made from an Education
IRA, earnings on contributions to the account are not subject to tax. Additional
restrictions apply as well.
During 1996, new federal legislation amended the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") and the underground storage
tank provisions of the Resource Conservation and Recovery Act to provide lenders
and fiduciaries with greater protections from environmental liability. In June
1997, the U.S. Environmental Protection Agency ("EPA") issued its official
policy with regard to the liability of lenders under CERCLA as a result of the
enactment of the Asset Conservation, Lender Liability and Deposit Insurance
Protection Act of 1996. California law provides that, subject to numerous
exceptions, a lender acting in the capacity of a lender shall not be liable
under any state or local statute, regulation or ordinance, other than the
California Hazardous Waste Control Law, to undertake a cleanup, pay damages,
penalties or fines, or forfeit property as a result of the release of hazardous
materials at or from the property.
In 1997, California adopted the Environmental Responsibility Acceptance Act
(Cal. Civil Code ss.ss. 850-855) to facilitate (i) the notification of
government agencies and potentially responsible parties (e.g., for cleanup) of
the existence of contamination and (ii) the cleanup or other remediation of
contamination by the potentially responsible parties. The Act requires, among
other things, that owners of sites who have actual awareness of a release of a
hazardous material that exceeds a specified notification threshold to take all
reasonable steps to identify the potentially responsible parties and to send a
notice of potential liability to the parties and the appropriate oversight
agency.
Pending Legislation and Regulations
There are pending legislative proposals to reform the Glass-Steagall Act to
allow affiliations between banks and other firms engaged in "financial
activities," including insurance companies and securities firms.
On September 16, 1997, the FDIC proposed two new rules governing minimum capital
levels that FDIC-supervised banks must maintain against the risks to which they
are exposed. The first proposed rule would make risk-based capital standards
consistent for two types of credit enhancements (i.e., recourse arrangements and
direct credit substitutes) and would require different amounts of capital for
different risk positions in asset securitization transactions. The second
proposed rule would permit limited amounts of unrealized gains on equity
securities to be recognized for risk-based capital purposes.
Certain other pending legislative proposals include bills to permit banks to pay
interest on business checking accounts, to cap consumer liability for stolen
debit cards, and to give judges the authority to force high-income borrowers to
repay their debts rather than cancel them through bankruptcy.
Competition
In the past, an independent bank's principal competitors for deposits and loans
have been other banks (particularly major banks), savings and loan associations
and credit unions. To a lesser extent, competition was also provided by thrift
and loans, mortgage brokerage companies and insurance companies. Other
institutions, such as brokerage houses, mutual fund companies, credit card
companies, and even retail establishments have offered new investment vehicles
which also compete with banks for deposit business. The direction of federal
legislation in recent years seems to favor competition between different types
of financial institutions and to foster new entrants into the financial services
market, and it is anticipated that this trend will continue.
The enactment of the Interstate Banking and Branching Act in 1994 as well as the
California Interstate Banking and Branching Act of 1995 will likely increase
competition within California. Regulatory reform, as well as other changes in
federal and California law will also affect competition. While the impact of
these changes, and of other proposed changes, cannot be predicted with
certainty, it is clear that the business of banking in California will remain
highly competitive.
Certain Additional Business Risks
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary from
the Company's anticipated future results.
Shares of the Company Common Stock eligible for future sale could have a
dilutive effect on the market for Company Common Stock and could adversely
affect the market price. The Articles of Incorporation of the Company authorize
the issuance of 20,000,000 shares of common stock, of which approximately
2,493,000 shares were outstanding at December 31, 1997. Pursuant to its stock
option plans, at December 31, 1997, the Company had outstanding options to
purchase an aggregate of 313,960 shares of Company Common Stock. As of December
31, 1997, 153,025 shares of Company Common Stock remained available for option
grants under the stock option plans. Sales of substantial amounts of Company
Common Stock in the public market could adversely affect the market price of the
Common Stock.
The Company has previously announced its intention to pursue acquisitions of
other financial services companies from time to time when such acquisitions are
believed by the Company to enhance shareholder value or satisfy other strategic
objectives of the Company. Other acquisitions, if any, could be accomplished by
the issuance of additional shares of Company Common Stock or other securities
convertible into or exercisable for such Common Stock.
The loan portfolio of the Company is dependent on real estate. At December 31,
1997, real estate served as the principal source of collateral with respect to
approximately 53% of the Company's loan portfolio. A worsening of current
economic conditions or rising interest rates could have an adverse effect on the
demand for new loans, the ability of borrowers to repay outstanding loans, the
value of real estate and other collateral securing loans and the value of the
available for sale investment portfolio, as well as the Company's financial
condition and results of operations in general and the market value for Company
Common Stock. Acts of nature, including earthquakes and floods, which may cause
uninsured damage and other loss of value to real estate that secures these
loans, may also negatively impact the Company's financial condition.
The Bank is subject to certain operational risks, including, but not limited to,
data processing system failures and errors and customer or employee fraud. The
Bank maintains a system of internal controls to mitigate such occurrences and
maintains insurance coverage for such risks, but should such an event occur that
was not prevented or detected by the Bank's internal controls, or that was
uninsured or in excess of the applicable insurance limits, it could have a
significant negative impact on the Company's financial condition or results of
operations.
The risks associated with the "Year 2000" problem involve both operational
issues relating to the Bank's data processing systems and the impact of this
problem on the operations of the Bank's customers. Both of these issues could
have a significant negative impact on the Company's financial condition or
results of operations including the level of the Bank's provision for possible
loan losses in future periods.
Statistical Data
Certain consolidated statistical information concerning the business of the
Company appears on page 12, under the caption "Selected Financial Data;" on
pages 13 through 29, under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations;" on pages 30 and 31, under the
caption "Quantitative and Qualitative Disclosures about Market Risk;" and on
pages 31 through 51, in the Company's Consolidated Financial Statements. Ratios
relating to the Company's Return on Equity and Assets appear on page 12. The
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" should be read in conjunction with the Company's
Consolidated Financial Statements.
ITEM 2: PROPERTIES
The Company shares common quarters with SJNB's only office at One North Market
Street, San Jose, California, 95113. Purchased by the Bank in 1985, the building
consists of approximately 24,000 square feet of basement, ground floor and
second floor space and is constructed and equipped to meet prescribed security
requirements.
In addition, the Bank assumed BB's lease for approximately 12,000 square feet
located at 95 South Market Street, San Jose, California when the Company
acquired BB in October 1994. Approximately 9,000 square feet of space at this
location is currently being occupied by two third-party tenants under subleases
which expire in September 2004 upon termination of the original BB lease. The
remaining space at this location is being occupied by the Bank's Financial
Services Division.
In the opinion of management, adequate insurance is being maintained on these
properties.
The Bank has invested in loans secured by real property collateral. The Bank's
policies with respect to such loans are described under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Loan Portfolio." The Bank's policies on real estate secured loans
may be changed without a vote of security holders.
ITEM 3: LEGAL PROCEEDINGS
Other than as set forth below, neither the Company or the Bank is a party to any
material pending legal proceeding, nor is their property the subject of any
material pending legal proceeding, except ordinary routine legal proceedings
arising in the ordinary course of the Bank's business and incidental to its
business, none of which are expected to have a material adverse impact upon the
Company's business, financial position or results of operations.
The Bank has been named as a defendant in a lawsuit filed in the Santa Clara
County Superior Court (which has subsequently been remanded to U. S. Bankruptcy
Court jurisdiction) by Giannotta Properties, Inc. (the "Borrower"). The Borrower
had borrowed money from the Bank, had defaulted, and in settlement of a
subsequent lawsuit for collection, had given the Bank a security interest in
certain real property as security for the loan. The Borrower again defaulted on
the loan, the Bank declared a default and the foreclosure trustee conducted a
foreclosure sale of the real property on January 17, 1995. The property was
purchased at the foreclosure sale by a third party. The Bank recovered the full
amount owed to it by the Borrower. On January 18, 1995, the Borrower filed suit
against the Bank, the foreclosure trustee, the third party property purchaser,
and various other parties, alleging, among other things, a claim that the
foreclosure sale was improperly conducted. On December 22, 1996, the Borrower
filed its First Amended Complaint against a number of defendants alleging "about
$5 million" in damages as a result of the conduct described in its claims, which
amount appears to be unsubstantiated by the Borrower's pleadings or subsequent
discovery. The Bank answered the First Amended Complaint on February 10, 1997
denying all causes of action. The Plaintiff first and foremost seeks to overturn
the foreclosure sale. If Plaintiff is successful in that result, no damages will
be held against the Bank. If the Court finds that Plaintiff is entitled to
unwind the sale, but for some reason the real property is unavailable, money
damages could be awarded against the Bank; however, this result could be reached
only if the Court finds that the Notice of Sale recorded during the foreclosure
and subsequent continuances of the sale were legally defective. This is a
question of law, and the Bank cannot at the date of this Report predict how this
question will be resolved. The Bank intends to vigorously defend this lawsuit.
During 1995, the Bank (along with Comerica Bank-California, Santa Clara Land
Title and three principals of Century Loan Corporation) was served with a civil
complaint in a class action lawsuit filed in the Superior Court of Santa Clara
County, California. The lawsuit stemmed from the failure of Century Loan, a real
estate investment company now in bankruptcy, that borrowed approximately
$750,000 from the Bank during 1994. Plaintiffs were persons who invested in
deeds of trust sold by Century Loan. Their complaint alleged that they were
defrauded by Century Loan and its principals and that the Bank and other
defendants aided and abetted a fraudulent Ponzi scheme by the principals of
Century Loan.
The Court granted class certification to the Plaintiffs in December 1995,
permitting them to proceed on behalf of all Century Loan investors. On November
26, 1996, the Court granted summary judgment in favor of the Bank on all of the
Plaintiff's claims against it. The Court found no evidence that the Bank had
participated in any conspiracy with or aided and abetted Century Loan. On
December 4, 1996, the Court entered judgment in favor of the Bank, dismissing
the Plaintiffs' claims. Plaintiff's motion for a new trial was denied on January
27, 1997 and has subsequently been appealed. Plaintiffs have filed their opening
brief on appeal. Counsel for the Bank has filed a responsive brief. The
California Bankers Association has filed an amicus (friend-of-the-court) brief
arguing in favor of the Bank's position.
Oral argument has not yet been scheduled.
<PAGE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this Report.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 3, 1998, the Company had 2,516,558 shares of Common Stock
outstanding, held by approximately 1,800 beneficial shareholders. The Company's
Common Stock is listed on the NASDAQ National Market System under the symbol
"SJNB." The market makers of the common stock are: Sutro & Co., Hoefer & Arnett,
Inc., Dean Witter Reynolds, Inc., Sandler O'Neill & Partners, Van Kasper & Co.,
Inc., Torrey Pines Securities Inc., Herzog, Heine, Geduld, Inc. and Wedbush
Morgan Securities, Inc.
Stock Price
The following sets forth the high and low sales prices for the Company's Common
Stock during the periods indicated, as reported by NASDAQ, and the per share
cash dividends declared on the Common Stock.
QUARTERLY COMMON STOCK PRICE
- -----------------------------------------------------------
Price
of Common Stock Cash
High Low Dividends
- -----------------------------------------------------------
1996
- -----------------------------------------------------------
First Quarter $14.38 $13.13 -----
Second Quarter 16.88 14.00 $.15
Third Quarter 19.38 17.00 -----
Fourth Quarter 20.88 18.75 .18
- -----------------------------------------------------------
1997
- -----------------------------------------------------------
First Quarter 26.00 18.75 -----
Second Quarter 26.00 22.50 .21
Third Quarter 32.25 24.75 -----
Fourth Quarter 42.00 30.75 .24
- -----------------------------------------------------------
1998
- -----------------------------------------------------------
First quarter (through
March 3, 1998) 37.00 33.50 .14*
*Declared by the Board of Directors on January 21, 1998 and payable on March 2,
1998 to shareholders of record on February 9, 1998.
The Company's Board of Directors considers the advisability and amount of
proposed dividends each year. Future dividends will be determined in light of
the Company's earnings, financial condition, future capital funds, regulatory
requirements and such other factors as the Board of Directors may deem relevant.
The Company's primary source of funds for payment of dividends to its
shareholders will be receipt of dividends and management fees from the Bank. The
payment of dividends by banks is subject to various legal and regulatory
restrictions. See "Business - Supervision and Regulation Restrictions on
Dividends and Other Distributions."
From the period of 1993 through 1997, the Company maintained a policy of paying
semi-annual dividends to its shareholders. Effective with the first quarter of
1998, the Company commenced a policy to pay quarterly cash dividends to its
shareholders. It is the intention of the Company to continue payment of
dividends, subject to financial results and other factors which could limit or
restrict dividends as more fully discussed elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
ITEM 6: SELECTED FINANCIAL DATA
The following presents selected financial data and ratios for the five years
ended December 31, 1997:
(dollars in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
As of and for the Years Ended December 31,
STATEMENT OF OPERATIONS DATA : 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $18,489 $16,468 $14,295 $9,749 $7,163
Provision for possible loan losses (705) (190) (1,045) (600) (625)
Other income 1,013 846 966 744 682
Other expenses (9,910) (9,635) (8,797) (6,676) (5,276)
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,887 7,489 5,419 3,217 1,944
Income taxes 3,773 3,198 2,395 1,354 758
- -----------------------------------------------------------------------------------------------------------------------------
Net income $5,114 $4,291 $3,024 $1,863 $1,186
=============================================================================================================================
PER SHARE DATA:
- -----------------------------------------------------------------------------------------------------------------------------
Net income per share - basic $2.04 $1.73 $1.27 $1.05 $0.71
Net income per share - diluted 1.94 1.64 1.22 1.00 0.70
Cash dividends per share 0.45 0.33 0.21 0.16 0.14
Shareholders' equity per share 13.30 12.14 11.02 9.92 9.86
Tangible shareholders' equity per share 11.80 10.40 9.06 7.84 9.86
=============================================================================================================================
BALANCE SHEET DATA:
- -----------------------------------------------------------------------------------------------------------------------------
Balance sheet totals-end of year:
Assets $324,919 $309,403 $252,195 $205,949 $127,967
Loans 228,972 198,627 170,800 149,407 97,958
Deposits 270,345 244,639 196,692 180,287 109,712
Shareholders' equity 33,159 31,205 26,658 23,442 16,064
Average balance sheet amounts:
Assets $314,460 $274,868 $222,913 $153,717 $117,627
Loans 212,795 183,367 152,820 112,818 84,457
Earning assets 286,585 251,156 202,996 140,445 106,999
Deposits 265,340 217,716 183,282 133,897 100,899
Shareholders' equity 31,091 28,288 24,898 18,210 15,551
=============================================================================================================================
SELECTED RATIOS:
- -----------------------------------------------------------------------------------------------------------------------------
Return on average equity 16.45% 15.17% 12.15% 10.23% 7.63%
Return on average assets 1.63 1.56 1.36 1.21 1.01
Efficiency ratio (non-interest expense
as a percentage of total revenues) 50.82 55.65 57.64 63.62 67.25
Efficiency ratio excluding the amortization
of
intangibles and goodwill 48.39 52.77 53.92 62.04 67.25
Dividend payout ratio 21.95 19.30 16.67 17.18 19.22
Average equity to average assets 9.89 10.29 11.17 11.85 13.22
Leveraged capital ratio 9.06 9.28 9.00 9.33 12.02
Nonperforming loans to total loans 0.19 0.27 0.52 3.67 3.75
Net chargeoffs to average loans 0.10 0.04 0.33 1.11 0.14
Allowance for loan losses to total loans 1.96 2.02 2.25 2.22 2.10
Allowance for loan losses to
nonperforming loans 1,060.00 733.00 430.00 60.00 56.00
</TABLE>
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K includes forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking statements (which
do not involve the historical or financial statement information herein) involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statement. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry; changes in the interest rate
environment; general economic conditions, either nationally or regionally, are
less favorable than expected, resulting in, among other things, a deterioration
in credit quality and an increase in the provision for possible loan losses;
changes in the regulatory environment; changes in business conditions,
particularly in Santa Clara County and in the semiconductor industry; certain
operational risks involving data processing systems or fraud; volatility of rate
sensitive deposits; asset/liability matching risks and liquidity risks; risks
associated with the Year 2000; and changes in the securities markets. See also
the section included herein "Year 2000" and "Business - Certain Additional
Business Risks" and other risk factors discussed elsewhere in this Report.
The purpose of the following discussion is to address information pertaining to
the financial condition and results of operations of the Company that may not be
apparent from a review of the consolidated financial statements and related
notes. It also incorporates certain statistical information that is required by
Industry Guide 3 promulgated by the Securities and Exchange Commission. The
discussion should be read in conjunction with the aforementioned consolidated
financial statements, as found on pages 32 through 54. The interest earned and
yields on nontaxable securities have been adjusted to a fully-taxable equivalent
basis for all financial information presented in this Item 7.
Dollars are in thousands in the text, except per share amounts or as otherwise
noted.
Financial Review
Earnings Summary
For the year ended December 31, 1997, the Company reported net income of $5.1
million or $1.94 per diluted share as compared to net income of $4.3 million or
$1.64 per diluted share in December 31, 1996 (a 19% increase). Net income for
the year increased substantially over that of a year ago primarily due to the
increase of $2.0 million in net interest income offset by increases in the loan
loss provision and non-interest expense.
For the year ended December 31, 1996, the Company reported net income of $4.3
million or $1.64 per diluted share as compared to net income of $3.0 million or
$1.22 per diluted share in December 31, 1995 (a 43% increase). Net income for
the year increased substantially over that of the prior year primarily due to
the increase of $2.2 million in net interest income and a decrease in the
provision for loan losses of $855 in 1996. The increase in net interest income
and the reduction in the provision for loan losses was offset by an increase in
expenses primarily related to the increase in volumes.
As of December 31, 1997, consolidated assets were $325 million, gross loans were
$229 million, and deposits were $270 million. Total consolidated assets
increased $16 million from $309 million a year ago, representing a 5.2%
increase. Loan and deposit growth was generated by increased marketing and
business development efforts of the Bank.
As of December 31, 1996, consolidated assets were $309 million, gross loans were
$199 million, and deposits were $245 million. Total consolidated assets
increased $57 million from $252 million in the prior year, representing a 23%
increase. Loan and deposit growth was generated by increased marketing and
business development efforts of the Bank.
Net Interest Income and Margin
Net interest income is the principal source of the Company's operating earnings.
Significant factors affecting net interest income are rates, volumes and mix of
the loan investment and deposit portfolios.
<PAGE>
<TABLE>
<CAPTION>
The following table shows the composition of average earning assets and average
funding sources, average yields and rates and the net interest margin for the
three years ended December 31, 1997.
AVERAGE BALANCES, RATES AND YIELDS
(dollars in thousands)
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Average Avg. Average Avg. Average Avg.
Yield/ Yield/ Yield/
Assets Balance Interest Rate Balance Interest Rate Paid Balance Interest Rate
Paid Paid
- ----------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net (1) $212,795 $22,732 10.68% $183,367 $20,422 11.14% $152,820 $18,016 11.79%
Securities available for sale (2) 48,178 2,982 6.19 47,666 2,907 6.10 30,619 1,847 6.03
Securities held to maturity:
Taxable (3) 11,929 806 6.76 12,356 813 6.58 12,122 758 6.25
Nontaxable (4) 2,916 235 8.06 2,866 227 7.91 2,601 201 7.72
Money market investments 10,767 586 5.44 4,901 258 5.26 4,834 280 5.79
Interest rate hedging instruments ---- (9) ---- ---- (9) ---- ---- (43) ----
- ---------------------------------------------------------- ------------------- -------------------
Total interest-earning assets 286,585 27,332 9.54 251,156 24,618 9.80 202,996 21,059 10.37
- ---------------------------------------------------------- ------------------- -------------------
Allowance for possible loan losses (4,162) (3,980) (3,574)
Cash and due from banks 20,008 15,944 11,668
Other assets 7,835 6,842 7,035
Core deposit intangibles and goodwill, net 4,194 4,906 4,788
- ------------------------------------------------ ---------- ---------
Total $314,460 $274,868 $222,913
================================================ ========== =========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $46,126 1,178 2.55 $41,322 1,155 2.79 $30,915 1,158 3.74
Money market and savings 85,696 3,061 3.57 60,833 2,035 3.35 51,654 1,751 3.39
Certificates of deposit:
Less than $100 14,987 792 5.28 14,628 802 5.48 15,519 826 5.32
$100 or more 53,662 2,964 5.52 46,794 2,608 5.57 40,305 2,232 5.54
- ---------------------------------------------------------- ------------------- -------------------
Total certificates of deposit 68,649 3,756 5.47 61,422 3,410 5.55 55,824 3,058 5.48
- ---------------------------------------------------------- ------------------- -------------------
Other short-term borrowings 12,610 754 5.98 24,467 1,459 5.96 11,663 716 5.88
- ---------------------------------------------------------- ------------------- -------------------
Total interest-bearing liabilities 213,081 8,749 4.11 188,044 8,059 4.29 150,056 6,683 4.45
- ---------------------------------------------------------- ------------------- -------------------
Noninterest-bearing demand 64,869 54,139 44,889
Accrued interest payable and
other liabilities 5,419 4,397 3,070
- ------------------------------------------------ ---------- ---------
Total liabilities 283,369 246,580 198,015
- ------------------------------------------------ ---------- ---------
Shareholders' equity 31,091 28,288 24,898
- ------------------------------------------------ ---------- ---------
Total $314,460 $274,868 $222,913
================================================---------- ==========--------- =========----------
Net interest income and margin (5) $18,583 6.48% $16,559 6.59% $14,376 7.08%
======================================= =================== =================== ===================
<FN>
(1) Includes amortized loan fees of $1,014 for 1997, $1,018 for 1996 and $1,123
for 1995. Nonperforming loans have been included in average loan balances.
(2) Includes dividend income of $219, $217 and $233 received in 1997, 1996 and
1995, respectively.
(3) Includes dividend income of $31 received in 1997 and 1996 and $30 in 1995.
(4) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($94 in 1997, $91 in 1996 and $81 in 1995).
(5) The net interest margin represents the net interest income as a percentage
of average earning assets.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following table shows the effect on the interest differential of volume and
rate changes for the years ended December 31, 1997 and 1996:
VOLUME/RATE ANALYSIS
(dollars in thousands)
1997 vs. 1996 1996 vs. 1995
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) Increase (decrease)
due to change in due to change in
- ----------------------------------------------------------------------------------------------------------------------------
Average Average Total Average Average Total
Volume Rate Change Volume Rate (2) Change
- ----------------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $3,098 $(788) $2,310 $3,326 $(500) $2,826
Securities:
Available for sale 31 44 75 1,039 21 1,060
Taxable (32) 25 (7) 15 40 55
Nontaxable 4 4 8 21 5 26
Money market investments 319 9 328 4 (26) (22)
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 3,420 (706) 2,714 4,405 (460) 3,945
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest checking 90 (67) 23 (12) 9 (3)
Money market and savings 880 146 1,026 307 (23) 284
Certificates of deposits:
Less than $100 21 (31) (10) (51) 27 (24)
$100 or greater 379 (23) 356 361 15 376
Other short-term borrowings (709) 4 (705) 733 10 743
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 661 29 690 1,338 38 1,376
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate hedging instruments ---- ---- ---- ---- 34 34
- ----------------------------------------------------------------------------------------------------------------------------
Change in net interest income $2,759 $(735) $2,024 $3,067 $(464) $2,603
============================================================================================================================
<FN>
(1) The effect of the change in loan fees is included as an adjustment to the average rate and is described in greater
detail below.
(2) Excluded from the average rate column for interest income on loans is $420 of interest income collected in 1995 on a
cash basis which pertains to prior periods.
</FN>
</TABLE>
Consolidated net interest income (on a fully taxable equivalent basis) was $18.6
million in 1997, as compared to $16.6 million in 1996. The $2.0 million increase
in net interest income during 1997 was due primarily to an increase in the
volume of earning assets. The Bank's net interest margin for 1997 was 6.48%, as
compared to 6.59% in 1996. The decrease in the net interest margin was primarily
due to the impact of the competitive market and the resulting pressure on loan
interest rates. The Bank's average prime was 8.44% in 1997, as compared to 8.27%
in 1996. In a declining rate environment, the Company must generally increase
its earning assets in order to maintain net interest income growth.
Consolidated net interest income (on a fully taxable equivalent basis) was $16.6
million in 1996, as compared to $14.4 million in 1995. The $2.2 million increase
in net interest income during 1996 was due primarily to an increase in the
volume of earning assets. The Bank's net interest margin for 1996 was 6.59%, as
compared to 7.08% in 1995. The decrease in the net interest margin was primarily
due to: (i) the receipt of substantial interest income on a cash basis in 1995
(approximately $588) for loans that had been on nonaccrual status; (ii) the
impact of the declining interest rate environment in 1996; and (iii) the impact
of the competitive market and the resulting pressure on loan interest rates.
The Bank's average prime was 8.27% in 1996, as compared to 8.83% in 1995.
Loan fees contributed 4.5% of loan portfolio interest during 1997, 5.0% in 1996
and 6.2% in 1995. This decline in the proportion of loan fees to total loan
interest was due mainly to the increase in the competitive atmosphere relating
to loan pricing, the overall level of interest rates and the higher proportion
of SBA loans included in the loan portfolio (SBA loans generally have lower
origination fees).
Interest expense in 1997 was $8.7 million as compared to $8.1 million in 1996.
This was mainly due to the increase in volumes. Actual interest expense rates
declined from 4.29% in 1996 to 4.11% in 1997 (this compares to a decrease in the
yields on earning assets of 9.80% in 1997 to 9.54% in 1996). Proportionately
interest expense declined at a greater rate than interest income in management's
view because the Bank took measures to assure the most efficient product pricing
for deposit products.
Interest expense in 1996 was $8.1 million as compared to $6.7 million in 1995.
This was mainly due to the increase in volumes. Actual interest expense rates
declined from 4.45% in 1995 to 4.29% in 1996. This compares to a decrease in the
yields on earning assets of 10.37% in 1995 to 9.80% in 1996.
A substantial portion of the Bank's deposits (an average of 24% in 1997, 25% in
1996 and 24% in 1995) are non interest-bearing and therefore do not reprice when
interest rates change. See "Funding." This is somewhat ameliorated by a
significant amount of corporate account balances which are tied to earnings
credits and utilized to offset bank service costs.
Due to the nature of the Company's lending markets in which loans are generally
tied to the Prime rate, an increase in interest rates should positively affect
the Company's future earnings, while a decline in interest rates would have a
negative impact. In late 1997 and early 1998, market interest rates declined
significantly due to several factors most notable of which were the
strengthening of the dollar, the Asia crisis and the collective wisdom that
inflation has receded. Should this "market" trend of declining interest rates
continue during 1998, the Bank could experience an additional increase in its
cost of funds relative to the yields earned on its earning assets and a decrease
in its net interest margin.
The Company's net interest margin for the periods presented is high relative to
its peer group, mainly due to its high proportion of non interest-bearing
deposits and the impact of the Bank's Financial Services Division.
Net interest income also reflects the impact of nonperforming loans. The effect
of nonaccrual loans on interest income for the years ended December 31, 1997,
1996 and 1995 was as follows:
NEGATIVE IMPACT OF NONACCRUAL LOANS
(dollars in thousands) For the Years
Ended December 31,
- ------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------
Interest revenue which
would have been
recorded under
original
terms $61 $35 $111 $359 $265
Interest revenue
actually
realized 32 29 11 121 126
- ------------------------------------------------------------
Negative impact on
interest revenue $29 $6 $100 $238 $139
============================================================
This table does not reflect the cash basis interest received on several
significant loan collections during 1995, as such loans were not classified as
nonaccrual as of the end of the year. The impact of such was significant in
1995. Approximately $588 of interest income was recognized in 1995 on collection
of certain loans classified nonaccrual, which resulted in a 29 basis point
impact on the net interest margin.
Provision for Possible Loan Losses
The level of the allowance for possible loan losses (and therefore the related
provision) reflects the Company's judgment as to the inherent risks associated
with the loan and factoring portfolios. Since estimates of the adequacy of the
Company's allowance for possible loan losses are based on foreseeable risks,
such judgments are subject to change based on changing circumstances. Based on
management's current evaluation of such risks, as well as judgments of the
Company's regulators, additions of $705, $190 and $1.0 million were made to the
allowance for possible loan losses in 1997, 1996 and 1995, respectively.
Management's determinations of the provision in 1997, 1996 and 1995 were based
on the measurement of the possibility of future estimated loan losses through
various objective and subjective criteria and the impact of net chargeoffs. See
"Loan Portfolio" for a detailed discussion of asset quality and the allowance
for possible loan losses.
<PAGE>
Other Income
<TABLE>
<CAPTION>
The following table sets forth the components of other income and the percentage
distribution of such income for the years ended December 31, 1997, 1996 and
1995.
OTHER INCOME
(dollars in thousands)
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Depositor service charges $607 59.92% $551 65.13% $553 57.25%
Other operating income 453 44.72 437 51.65 456 47.20
Net loss on securities available for sale (47) (4.64) (142) (16.78) (43) (4.45)
- ----------------------------------------------------------------------------------------------------------------------------
Total $1,013 100.00% $846 100.00% $966 100.00%
============================================================================================================================
</TABLE>
Other income totaled $1.013 million in 1997, $846 in 1996 and $966 in 1995. This
reduced levels of other income in 1996 were the result of the recognition of
$142 of securities losses in that year.
Other Expense
The components of other expense are set forth in the following table for the
years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
OTHER EXPENSE AS A PERCENT OF AVERAGE ASSETS
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $5,725 1.82% $5,517 2.01% $4,339 1.95%
Occupancy 725 .23 701 .26 740 .33
Amortization of core deposit intangibles
and goodwill 473 .15 499 .18 569 .26
Data processing 441 .14 554 .20 458 .20
Business promotion 369 .12 365 .13 314 .14
Client services 345 .11 247 .09 247 .11
Legal and professional fees 331 .11 369 .13 476 .21
Directors' fees and costs 226 .07 219 .08 239 .11
Stationery and supplies 183 .06 183 .07 180 .08
Advertising 171 .05 236 .09 186 .08
Regulators' assessments 109 .03 72 .03 283 .13
Loan and collection 104 .03 151 .05 215 .10
Net cost of other real estate owned (72) (.02) (48) (.02) 45 .02
Other 780 .25 570 .21 506 .23
- ---------------------------------------------------------------------------------------------------------------------------
Total $9,910 3.15% $9,635 3.51% $8,797 3.95%
============================================================================================================================
</TABLE>
Total other expenses increased approximately $275 or 2.8% in 1997 as compared to
1996. This is primarily related to the increase in salaries and benefits due to
staff growth related to the increased level of Bank's business activity and an
increase in the provision for incentive payments for exceeding predefined goals.
Business promotion and advertising expenses declined due to costs of promotions
incurred in 1996. In addition, the Bank's data processing costs declined due to
the termination of payments for its previous data processing software. During
1997 the Bank acquired a new processing system for a total cost of approximately
$600. This cost will be amortized over a five year period commencing in November
1997. Amortization of core deposit intangibles is based on a declining balance
method, and as such, the amount charged to expense will decline each year. Costs
relating to client services increased approximately $100 during 1997 as compared
to 1996 mainly due to the addition of significant clients utilizing services
purchased by the Bank.
<PAGE>
Total other expenses increased approximately $838 or 9.5% in 1996 as compared to
1995. This is primarily related to the increase in salaries and benefits due to
the January 1996 acquisition of Astra Financial Corp., staff growth related to
the increased level of Bank's business activity and an increase in the provision
for incentive payments for exceeding predefined goals. Business promotion and
advertising expenses rose due to increased competitive pressure. In addition,
the Bank made significant investments in technology to support the continued
productivity of its staff.
The FDIC reduced its premium on insurable deposits effective June 1995 from 23
cents per $100 of deposits to 4 cents. This resulted in savings to the Bank of
$216 for 1996. Currently the premium on insurable deposits is 1.3 cents per $100
of insured deposits. In addition, as the Bank's credit quality continued to
improve in 1996, there were significant reductions in its related cost, such as
legal and professional fees, loan and collection expense and the net costs of
other real estate owned, totaling $264.
Income Taxes
The effective tax rate was 42% in 1997, 43% in 1996 and 44% in 1995. The lower
effective tax rates in 1997 and 1996 was primarily due to the reduction in the
amount and proportion of amortization of the nondeductible portion of
intangibles to pretax income arising in connection with the purchase of BB and
Astra Financial Corp.
Quarterly Income
The unaudited consolidated income statement data of the Company and the Bank, in
the opinion of management, includes all normal and recurring adjustments
necessary to state fairly the information set forth therein. The results of
operations are not necessarily indicative of results for any future period. The
following table shows the Company's unaudited quarterly income statement data
for the years 1997 and 1996:
<TABLE>
UNAUDITED QUARTERLY INCOME STATEMENT DATA
(dollars in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
First quarter Second quarter Third quarter Fourth quarter
1997 1996 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $4,208 $3,921 $4,635 $4,019 $4,675 $4,228 $4,971 $4,300
Provision for possible loan losses ----- (20) (180) (30) (215) (50) (310) (90)
Other income 268 260 221 173 247 182 277 231
Other expenses (2,387) (2,473) (2,526) (2,340) (2,463) (2,423) (2,534) (2,399)
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,089 1,688 2,150 1,822 2,244 1,937 2,404 2,042
Income taxes (884) (729) (908) (778) (948) (817) (1,033) (874)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $1,205 $959 $1,242 $1,044 $1,296 $1,120 $1,371 $1,168
=============================================================================================================================
Net income per share - basic $0.47 $0.40 $0.50 $0.43 $0.52 $0.45 $0.55 $0.46
=============================================================================================================================
Net income per share - diluted $0.45 $0.37 $0.48 $0.40 $0.50 $0.42 $0.52 $0.44
=============================================================================================================================
</TABLE>
The Company reported net income of $1,371 for the quarter ended December 31,
1997, compared with net income of $1,168 for the fourth quarter of 1996. The
results for the fourth quarter of 1996 as compared to the same quarter a year
ago reflect an increase in volume of earning assets ($287 million in 1997
compared to $251 million in 1996) offset by a decline in net interest margins
(6.48% in 1997 and 6.59% in 1996), a higher loan loss provision due to growth of
loan portfolio and increased salaries and benefits relating to the increase
volume of activity.
<PAGE>
Financial Condition and Earning Assets
Money Market Investments
Money market investments, which include federal funds sold and other short-term
investments were $2.7 million at December 31, 1997 as compared to $19.8 million
at December 31, 1996. This decrease relates to the reduction in the amount of
the Bank's short-term borrowings of $13.7 million.
The average balance of money market investments, which include federal funds
sold and liquid money market investments, was $10.8 million in 1997 and $4.9
million in 1996. These balances represented 4% and 2% of average deposits for
1997 and 1996, respectively. They are maintained primarily for the short-term
liquidity needs of the Bank. The increase in money market investments related to
the growth of certain volatile deposits. See "Capital and Liquidity."
Securities
<TABLE>
<CAPTION>
The following table shows the book value composition of the securities portfolio
at December 31, 1997, 1996 and 1995. At December 31, 1997 there were no issuers
of securities for which the aggregate book value of securities of such issuer
held by the Bank exceeded 10% of the Company's shareholders' equity.
INVESTMENT SECURITIES COMPOSITION
(dollars in thousands) December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale:
<S> <C> <C> <C>
U. S. Treasury $5,041 $4,005 $4,057
U. S. Government Agencies 34,327 34,285 34,578
Mortgage Backed 5,171 5,868 9
Mutual funds 3,766 3,886 3,898
- ----------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale 48,305 48,044 42,542
- ----------------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity:
U. S. Treasury 1,992 1,975 4,265
U. S. Government Agencies 5,485 7,463 4,976
State and municipal 3,224 2,635 3,060
Mortgage Backed 2,518 2,481 2,428
Other 518 518 519
- ----------------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity 13,737 15,072 15,248
- ----------------------------------------------------------------------------------------------------------------------------
Total $62,042 $63,116 $57,790
============================================================================================================================
</TABLE>
Investment securities classified as available for sale, which include all mutual
funds, are acquired without the intent to hold until maturity. At December 31,
1997 the Bank's weighted average maturity of the available for sale investment
portfolio was 1.75 years. It is estimated that for each 1% change in interest
rates, the value of the Company's securities held to maturity will change by
approximately 1.49%.
Any unrealized gain or loss on investment securities available for sale is
reflected in the carrying value of the security and reported net of income taxes
in the equity section of the condensed consolidated balance sheets. Realized
gains and losses are reported in the condensed consolidated statement of
operations. The net unrealized gain, net of tax, on securities available for
sale as of December 31, 1997 was $105.
Investment securities classified as held to maturity include those securities
which the Company has the ability and intent to hold to maturity. The Company's
policy is to generally acquire "A" rated or better state and municipal
securities. The specific issues are monitored for changes in financial
condition. Appropriate action would be taken if significant deterioration was
noted.
The pre-tax unrealized gain on investment securities held to maturity was $106
as of December 31, 1997 as compared to $159 as of December 31, 1996. The
reduction in unrealized gains resulted from the significant decrease in interest
rates in 1996. Decreases in interest rates have an inverse effect on the value
of securities for which the interest rate is fixed. The Bank's weighted average
maturity of the held to maturity investment portfolio was approximately 2.02
years as of December 31, 1997. It is estimated that for each 1% change in
interest rates, the value of the Company's securities held to maturity will
change by approximately 1.43%. This volatility decreases as the average maturity
shortens. Since it is the intention of management to hold these securities to
maturity, the unrealized gains will be realized over the life of the securities
as above market interest income is recognized.
<PAGE>
Mortgage backed securities ("MBS") are considered to have increased risks
associated with them because of the timing of principal repayments. As interest
rates decrease, the average maturity of mortgages underlying MBS's tend to
decline; as rates increase maturities tend to lengthen. At December 31, 1997,
the Company had the following securities which were mortgage-backed or related
securities:
Fair
(dollars in thousands) Cost Value
- --------------------------------------- --------- ----------
Federal Home Loan Mortgage Corp.
(U.S. Agency) $4,902 $4,957
Federal National Mortgage Association
(U.S. Agency) 2,712 2,762
Federated ARMs Funds * 1,686 1,648
Overland Variable Rate
Government Fund* 1,129 1,046
* The assets of these mutual funds are invested mainly in
adjustable rate U.S. Treasury or U.S. Government Agency
securities.
Loan Portfolio
<TABLE>
<CAPTION>
The following table shows the Company's consolidated loans by type of loan or
borrower and their percentage distribution:
LOAN PORTFOLIO
(dollars in thousands)
December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $92,693 $77,335 $52,958 $51,045 $28,267
Real estate construction 17,818 15,451 14,488 16,343 15,492
Real estate-other 90,495 74,713 74,045 66,085 39,672
Consumer 9,042 8,622 8,800 9,461 6,857
Other 19,568 23,174 21,302 7,362 8,416
Unearned fee income (644) (668) (793) (888) (746)
- ----------------------------------------------------------------------------------------------------------------------------
Total loan portfolio $228,972 $198,627 $170,800 $149,407 $97,958
============================================================================================================================
Commercial 40.5% 38.9% 31.0% 34.2% 28.9%
Real estate construction 7.8 7.8 8.4 11.0 15.8
Real estate-other 39.5 37.6 43.4 44.2 40.5
Consumer 3.9 4.3 5.2 6.3 7.0
Other 8.6 11.7 12.6 4.9 8.6
Unearned fee income (.3) (.3) (.6) (.6) (.8)
- ----------------------------------------------------------------------------------------------------------------------------
Total loan portfolio 100.0% 100.0% 100.0% 100.0% 100.0%
============================================================================================================================
</TABLE>
General
The Company's loan portfolio consists primarily of short-term, floating rate
loans for business and real estate purposes. At December 31, 1997, approximately
40% of the loan portfolio was commercial loans (including non-real estate SBA
loans and Factoring), 8% was real estate construction, and 39% was in real
estate other. SJNB's legal lending limit for any one borrower was approximately
$4.8 million at December 31, 1997.
The commercial loan portfolio primarily consists of loans to small to
medium-sized businesses with gross revenues up to $25 million, as well as loans
to local professional businesspersons. SJNB's lending services include revolving
credit loans, SBA loans, term loans, accounts receivable financing, factoring,
equipment financing and letters of credit.
Included in commercial loans as of December 31, 1997 were factored accounts
receivable of approximately $4.9 million or 2.1% of total loans. As of December
31, 1996, factored accounts receivable were $4.4 million or 2.2% of total loans.
The Bank purchases accounts receivable from clients and then receives payment
directly from the party obligated for the receivable. In most cases, the Bank's
Financial Services Division purchases the receivables subject to recourse from
the Bank's factoring client. The factoring business and related purchasing of
accounts receivable is subject to a greater degree of risk than normal lending
due to the involvement of the third party obligee, the lack of control over the
direct receipt of payment, and the potential purchase of fraudulent or inflated
receivables. To date, there have been no significant losses relating to the
Bank's factoring program.
In addition commercial loans include approximately $13 million of SBA loans
which are not made for real estate purposes. These loans carry a 70 to 80%
guarantee by the SBA.
The real estate construction portfolio (7.8% of the loan portfolio) consists of
64% residential and 36% commercial. Such loans are made on the basis of the
economic viability for the specific project, the cash flow resources of the
developer, the developer's equity in the project and the underlying financial
strength of the borrower. The Company's policy is to monitor each loan with
respect to incurred costs, sales price and sales cycle.
The real estate-other loans include term loans (up to a twenty-five year
maturity) on income-producing commercial properties. These loans include SBA
real estate type loans.
Consumer loans consist primarily of loans to individuals for personal uses, such
as home equity loans, installment purchases, premier lines (unsecured lines of
credit) and overdraft protection loans, and a variety of other consumer
purposes.
Other loans include loans to real estate developers for short-term investment
purposes (approximately $1.2 million), loans for real estate investment purposes
made to non-developers (approximately $7.6 million), and loans for other
investments (approximately $6.8 million).
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions. Although the Company has a diversified loan portfolio, a substantial
portion of its customers' ability to honor loan terms is reliant upon the
economic stability of Santa Clara County, which in some degree relies on the
stability of high technology companies in its "Silicon Valley." Loans are
generally made on the basis of a secure repayment source as the first priority
and collateral is generally a secondary source for loan qualification.
Approximately 53% of the loan portfolio is directly related to real estate or
real estate interests, when real estate construction loans, real estate-other
loans, Prime equity loans (included in consumer loans in the amount of $5.0
million) and certain other loans to real estate developers and other investors
for short-term investment purposes (approximately 3.8% of the loan portfolio)
are included. Included in the real estate-other category are approximately $26
million of SBA real estate type loans, of which, 70% to 80% are guaranteed by
the SBA. Approximately 40.5% of the loan portfolio is made up of commercial
loans; however, no particular industry represents a significant portion of such
loans.
Inherent in any loan portfolio are risks associated with certain types of loans.
The Company attempts to limit these risks through conservative loan policies and
review procedures that are applied at the time of origination. Included in these
policies are specific maximum loan-to-value (LTV) limitations as to various
categories of real estate related loans. These ratios are as follows:
Maximum LTV
Category of Real Estate Collateral Ratio
- --------------------------------------------- --------------
Raw land 50%
Land Development 60
Construction:
1-4 Single family residence,
Less than $500 80
Greater than $500 80
Other 80
Term loans (construction take-out
and commercial) 75
Other improved property 70
Prime equity loans 80
The Company's loan policy provides that any term loans on income-producing
properties must have a minimum debt service coverage of at least 1.2 to 1 for
non-owner occupied property and at least 1.1 to 1 for owner occupied.
One of the significant risks associated with real estate lending is the risk
associated with the possible existence of environmental risks or hazards on or
in property affiliated with the loan. The Bank mitigates such risk through the
use of an Environmental Risk Questionnaire for all loans secured by real estate.
A Phase I environmental report is required if indicated by the questionnaire or
if for any other reason it is determined appropriate. Other reasons would
include the industrial use of environmentally sensitive substances or the
proximity to other known environmental problems. A Phase II report is required
in certain cases, depending on the outcome of the Phase I report.
Activity
Total loans were $229 million, $199 million and $171 million at December 31,
1997, 1996 and 1995, respectively. Gross loans averaged $213 million, $183
million and $153 million for the years ended 1997, 1996 and 1995, respectively.
The increase in total loans of $30 million during 1997 relates to the overall
growth in the Bank's loan portfolio. The most significant areas of growth were
the increase in commercial loans of $15 million. In addition Real Estate
Construction increased $2.4 million, while Real Estate - other increased $16
million, of which $10.9 million was SBA real estate loans. During 1996 the most
significant areas of growth were the increase in SBA loans (included in the
commercial and real estate-other loan categories) of $8 million and other
commercial loans of $16 million. These increases were mainly due to the Bank's
business development efforts and the strength of the local economy. The increase
in loans for 1995 was primarily related to a $14 million increase in SBA loans.
The economic climate in Northern California has been generally strong in 1997
and 1996. However, the competitive environment within the Bank's marketplace for
additional loan growth has become more aggressive between lenders resulting in
increasingly competitive pricing. To the extent that such competitive activity
continues during 1998 and the Bank finds it necessary to meet such competition,
the Bank's net interest margins could decline. In addition, its uncertain what
impact the economic crisis currently unfolding in Asia will have on Silicon
Valley and, potentially, the business of the Bank.
Asset Quality
Allowance for Possible Loan Losses
A consequence of lending activities is that losses may be experienced. The
amount of such losses will vary from time to time depending upon the risk
characteristics of the loan portfolio as affected by economic conditions, rising
interest rates and the financial experience of borrowers. The allowance for
possible loan losses, which provides for the risk of losses inherent in the
credit extension process, is increased by the provision for possible loan losses
charged to expense and decreased by the amount of charge-offs net of recoveries.
There is no precise method of predicting specific losses or amounts that
ultimately may be charged off on particular segments of the loan portfolio.
Similarly, the adequacy of the allowance for possible loan losses and the level
of the related provision for possible loan losses is determined on a judgmental
basis by management based on consideration of:
o Economic conditions;
o Borrowers' financial condition;
o Loan impairment;
o Evaluation of industry trends;
o Industry and other concentrations;
o Loans which are contractually current as to payment terms but
demonstrate a higher degree of risk as identified by management;
o Continuing evaluation of the performing loan portfolio;
o Monthly review and evaluation of problem loans identified as having loss
potential;
o Quarterly review by the Board of Directors;
o Off balance
sheet risks; and
o Assessments by regulators and other third parties.
In addition to the internal assessment of the loan portfolio (and off balance
sheet credit risk, such as letters of credit, etc.), the Company also retains a
consultant who performs credit reviews on a quarterly basis and then provides an
assessment of the adequacy of the allowance for possible loan losses.
Examinations of the loan portfolio are also conducted periodically by the
federal banking regulators.
The Company utilizes a method of assigning a minimum and maximum loss ratio for
each grade of loan within each category of loans (commercial, real estate-other,
real estate construction, etc.) Loans are graded on a ranking system based on
management's assessment of the loan's credit quality. The assigned loss ratio is
based upon the Company's prior experience, industry experience, delinquency
trends and the level of nonaccrual loans. In addition, the Company's methodology
considers (and assigns a risk factor for) current economic conditions, off
balance sheet risk and concentrations of credit. The methodology provides a
systematic approach for the measurement of the possible existence of future loan
losses. Management and the Board of Directors evaluate the allowance and
determine its desired level considering objective and subjective measures, such
as knowledge of the borrowers' business, valuation of collateral, the
determination of impaired loans and exposure to potential losses. Based on known
information available to it at the date of this Report, management believes that
the Company's allowance for possible loan losses, determined as described above,
was adequate for foreseeable losses at December 31, 1997.
The allowance for possible loan losses is a general reserve available against
the total loan portfolio and off balance sheet credit exposure. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for possible loan losses. Such agencies
may require the Bank to provide additions to the allowance based on their
judgment of information available to them at the time of their examination.
There is uncertainty concerning future economic trends. Accordingly, it is not
possible to predict the effect future economic trends may have on the level of
the provision for possible loan losses in future periods.
<PAGE>
The following table summarizes the activity in the allowance for possible loan
losses for the five years ended December 31, 1997:
<TABLE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
(dollars in thousands) Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of the year $4,005 $3,847 $3,311 $2,057 $1,553
- -----------------------------------------------------------------------------------------------------------------------------
Chargeoffs by loan category:
<S> <C> <C> <C> <C> <C>
Commercial 242 233 233 148 389
Real estate construction ----- ----- 154 ----- -----
Real estate-other 33 70 220 637 5
Consumer 13 22 89 73 90
Other ----- 93 ----- 824 26
- -----------------------------------------------------------------------------------------------------------------------------
Total chargeoffs 288 418 696 1,682 510
- -----------------------------------------------------------------------------------------------------------------------------
Recoveries by loan category:
Commercial 67 258 42 192 21
Real estate construction ----- ----- ----- ----- 200
Real estate-other 4 13 27 10 5
Consumer ----- 65 16 7 16
Other ----- ----- 102 222 147
- -----------------------------------------------------------------------------------------------------------------------------
Total recoveries 71 336 187 431 389
- -----------------------------------------------------------------------------------------------------------------------------
Net chargeoffs 217 82 509 1,251 121
- -----------------------------------------------------------------------------------------------------------------------------
Provision charged to expense 705 190 1,045 600 625
Allowance relating to acquired businesses ----- 50 ----- 1,905 -----
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of the year $4,493 $4,005 $3,847 $3,311 $2,057
=============================================================================================================================
Ratios:
Net chargeoffs to average loans 0.10% 0.04% 0.33% 1.11% 0.14%
Allowance to total loans at the end of the year 1.96 2.02 2.25 2.22 2.10
Allowance to nonperforming loans at end of the year 1,060.00 733.00 430.00 60.00 56.00
=============================================================================================================================
</TABLE>
Net chargeoffs were $217 or 0.10% of average loans during 1997. Net chargeoffs
were $82 or 0.04% of average loans during 1996. During 1995, the Company
experienced net chargeoffs of $509 or 0.33% of average loans during 1995. The
decrease in net chargeoffs in 1996 as compared to 1995 resulted primarily from
improved credit quality of the overall loan portfolio. Management does not
believe there were any trends indicated by the detail of the aggregate
charge-offs for any of the periods discussed.
The allowance for possible loan losses as a percentage of total loans was 1.96%,
2.02%, and 2.25% at December 31, 1997, 1996 and 1995, respectively. The
allowance for possible loan losses as a percentage of nonperforming loans was
approximately 1,060%, 733% and 430% at December 31, 1997, 1996, 1995,
respectively. Nonperforming loans were $424, $546 and $894 at December 31, 1997,
1996, 1995, respectively. See "Nonperforming Loans" below.
<PAGE>
Based on an evaluation of individual credits, historical credit loss experienced
by loan type and economic conditions, management has allocated the allowance for
possible loan losses as follows for the past five years:
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
(dollars in thousands) Amount of Allowance Allocation at December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $1,741 $1,335 $1,193 $1,192 $459
Real estate construction 236 223 176 310 181
Real estate-other 1,430 1,334 1,134 1,051 567
Consumer 158 126 169 219 99
Other 167 236 337 94 101
Unallocated 761 751 838 445 650
- ----------------------------------------------------------------------------------------------------------------------------
Total $4,493 $4,005 $3,847 $3,311 $2,057
============================================================================================================================
Percent of Loans in Each Category
to Total Loans at December 31,
Commercial 40.5% 38.9% 31.0% 34.2% 28.9%
Real estate construction 7.8 7.8 8.4 11.0 15.8
Real estate-other 39.5 37.6 43.4 44.2 40.5
Consumer 3.9 4.3 5.2 6.3 7.0
Other 8.3 11.4 12.0 4.3 7.8
- ----------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
============================================================================================================================
</TABLE>
The allowance for possible loan losses is maintained without any internal
allocation to the segments of the loan portfolio and the entire allowance is
available to cover loan losses. The allocation is based on subjective estimates
that take into account historical loss experience and management's current
assessment of the relative risk characteristics of the portfolio as of the
reporting date noted above and as described more fully herein.
Nonperforming Loans
<TABLE>
<CAPTION>
Loans for which the accrual of interest has been suspended and other loans with
principal or interest contractually past due 90 days or more are set forth in
the following table:
NONPERFORMING LOANS
(dollars in thousands) December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis $360 $457 $866 $5,395 $3,678
Loans restructured and in compliance with modified terms 63 89 ---- ---- ----
Other loans with principal or interest contractually past
due 90 days or more 1 ---- 28 83 ----
- ------------------------------------------------------------------------------------------------------------------------------
Total $424 $546 $894 $5,478 $3,678
==============================================================================================================================
</TABLE>
Potential nonperforming loans are identified by management as part of its
ongoing evaluation and review of the loan portfolio. Based on such reviews and
information known to management at the date of this Report, management has not
identified any loans (other than those in the above table) about which it has
serious doubts regarding the borrowers' ability to comply with present loan
repayment terms, such that the loans might subsequently be classified as
nonperforming.
The accrual of interest on loans is discontinued and any accrued and unpaid
interest is reversed when, in the opinion of management, there is significant
doubt as to the collectibility of interest or principal or when the payment of
principal or interest is ninety days past due, unless the amount is well-secured
and in the process of collection.
<PAGE>
Other Real Estate Owned
At December 31, 1996, the Bank had two properties totaling $454 (there was none
at December 31, 1997) which were acquired through the foreclosure process. Prior
to recording a foreclosure, the Bank provides for any expected loss in its
allowance for possible loan losses. Any subsequent decline in value is charged
directly to the income statement.
Commitments and Lines of Credit
It is the Bank's policy not to issue formal commitments or lines of credit
except to a limited number of well-established and financially responsible local
commercial enterprises. Such commitments can be either secured or unsecured and
are typically in the form of revolving lines of credit for seasonal working
capital needs.
Occasionally, such commitments are in the form of a letter of credit to
facilitate the customer's particular business transaction. Commitments and lines
of credit typically mature within one year. These commitments involve (to
varying degrees) credit risk in excess of the amount recognized as either an
asset or liability in the statement of financial position. The Company attempts
to control credit risk through its credit approval process. The same credit
policies are used when entering into such commitments.
As of December 31, 1997, the Company had undisbursed loan commitments to extend
credit as follows:
UNDISBURSED LOAN COMMITMENTS
(dollars in thousands)
Loan Category Amount
- -----------------------------------------------------------
Commercial $52,111
Real estate construction 15,699
Real estate-other 587
Consumer 7,604
Other 16,645
- -----------------------------------------------------------
Total $92,646
===========================================================
In addition, there was approximately $12.2 million available for commitments
under unused letters of credit.
Funding
<TABLE>
<CAPTION>
Deposits represent SJNB's principal source of funds. Most of the Bank's deposits
are obtained from professionals, small to medium-sized businesses and
individuals within the Bank's market area. SJNB's deposit base consists of
non-interest and interest-bearing demand deposits, savings and money market
accounts, and certificates of deposit. The following table summarizes the
composition of deposits as of December 31, 1997, 1996 and 1995:
DEPOSIT CATEGORIES
(dollars in thousands) December 31, 1997 December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Total of Total Total of Total Total of Total
Amount Deposits Amount Deposits Amount Deposits
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $78,437 29.01% $80,774 33.02% $52,775 26.83%
Interest-bearing demand 45,655 16.89 40,113 16.40 34,641 17.61
Money market and savings 82,619 30.56 60,684 24.80 51,201 26.03
Certificates of deposit:
Less than $100 15,207 5.63 15,535 6.35 14,730 7.49
$100 or more 48,427 17.91 47,533 19.43 43,345 22.04
- ----------------------------------------------------------------------------------------------------------------------------
Total $270,345 100.00% $244,639 100.00% $196,692 100.00%
============================================================================================================================
</TABLE>
Deposits increased 11% from $245 million at December 31, 1996 to $270 million at
December 31, 1997. Deposits increased 25% from $197 million at December 31, 1995
to $245 million at December 31, 1996. These increases are mainly due to a
combination of factors including the development of customers with significant
cash balances, utilization of sophisticated cash management systems and
aggressive pricing of rates.
The Bank has been able to attract a significant proportion of its deposits in
the form of non-interest-bearing deposits. The Bank's primary business is
commercially oriented and therefore significant non-interest-bearing deposits
are maintained by its commercial customers. In a high interest rate environment,
these funds could be subject to disintermediation (moved for higher interest
rate products). To counter such possibilities, the Bank maintains an array of
products which it believes would be competitive in such an occurrence. In
addition, in illiquid economic times (possibly recessions) these deposits could
be subject to withdrawal pressures. See "Capital and Liquidity - Liquidity" for
a discussion of the Bank's liquidity sources.
The Bank also raises a substantial amount of funds through certificates of
deposit of $100 or greater. These deposits are usually at interest rates greater
than other types of deposits and are more sensitive to interest rate changes.
Historically, the Bank's overall cost of funds has been less than that of its
peer group. However, as these certificates of deposit are usually more interest
rate sensitive, their repricing in an increasing interest rate environment could
increase the Bank's cost of funds and negatively impact the Bank's net interest
margin. See "Capital and Liquidity."
The Bank utilizes short-term borrowings in its balance sheet management. The
short-term borrowings (securities sold under agreements to repurchase) are used
to fund the acquisition of fixed rate available for sale securities with an
average life of 1.73 years at December 31, 1997. The average cost of the
borrowings during 1997 was 5.77% while the average yield on the assets was
6.30%. If interest rates were to increase quickly, the cost of borrowings would
increase with no offsetting increase in the yield on the assets purchased. See
"Asset/Liability Management."
Asset/Liability Management
The Company defines interest rate sensitivity as the measurement of the mismatch
in repricing characteristics of assets, liabilities and off balance sheet
instruments at a specified point in time. This mismatch (known as interest rate
sensitivity gap) represents the potential mismatch in the change in the rate of
interest revenue accrual and interest expense that would result from a change in
interest rates. Mismatches in interest rate repricing among assets and
liabilities arise primarily from the interaction of various customer businesses
(i.e., types of loans versus the types of deposits maintained) and from
management's discretionary investment and funds gathering activities. The
Company attempts to manage its exposure to interest rate sensitivity. However,
due to its size and direct competition from the major banks, the Company must
offer products which are competitive in the market place, even if less than
optimum with respect to its interest rate exposure.
The Company's balance sheet position at December 31, 1997 was asset-sensitive,
based upon the significant amount of variable rate loans and the repricing
characteristics of its deposit accounts. This position provides a hedge against
rising interest rates, but has a detrimental effect during times of interest
rate decreases. Net interest revenues are negatively impacted by a decline in
interest rates. The interest rate gap is a measure of interest rate exposure and
is based upon the known repricing dates of certain assets and liabilities and
assumed repricing dates of others. See "Financial Review - Net Interest Income
and Margin."
The following table quantifies the Company's interest rate exposure at December
31, 1997 based upon the known repricing dates of certain assets and liabilities
and the assumed repricing dates of others. At December 31, 1997, the Company was
asset sensitive in the near term, as noted above.
<PAGE>
<TABLE>
DISTRIBUTION OF REPRICING OPPORTUNITIES
December 31, 1997
(dollars in thousands) After three After six After one
Within months but months but year but After
three within six within one within five
months months year five years years Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money market investments $2,700 $2,700
Investment securities-taxable 1,063 $1,053 $1,118 $7,280 ----- 10,514
Investment ----- 200 532 1,538 $953 3,223
securities-non-taxable
Securities available for sale 4,095 10,033 10,078 16,797 7,302 48,305
Loans 178,061 4,941 9,037 24,349 12,584 228,972
- ----------------------------------------------------------------------------------------------------------------------------
Total earning assets 185,919 16,227 20,765 49,964 20,839 293,714
- ----------------------------------------------------------------------------------------------------------------------------
Interest checking, money market
and savings 128,274 ----- ----- ----- ----- 128,274
Certificates of deposit:
Less than $100 9,177 3,504 1,391 1,060 75 15,207
$100 or more 36,009 5,422 5,148 1,599 249 48,427
Repurchase agreements 16,000 ----- ----- ----- ----- 16,000
Other borrowings ----- ----- ----- 137 439 576
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 189,460 8,926 6,539 2,796 763 208,484
liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate gap ($3,541) $7,301 $14,226 $47,168 $20,076 $85,230
============================================================================================================================
Cumulative interest rate gap ($3,541) $3,760 $17,986 $65,154 $85,230
=============================================================================================================
Interest rate gap ratio 0.98 1.82 3.18 17.87 27.31
=============================================================================================================
Cumulative interest rate gap ratio 0.98 1.02 1.09 1.31 1.41
=============================================================================================================
</TABLE>
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to reprice, they may react in different degrees to
changes in market interest rates. Additionally, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market interest rates. Further, certain earning assets have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. The Company considers the anticipated effects of these various
factors in implementing its interest rate risk management activities, including
the utilization of certain interest rate hedges.
A large proportion of the Bank's deposits are non interest-bearing demand
deposits and are not included in the above table as they tend not to be interest
rate sensitive. The average balance of these deposits was $65 million in 1997.
In addition, the Bank's total tangible capital of approximately $29 million is
not included as a funding source in the above table.
To counter its asset sensitive interest rate position, the Bank entered into an
interest rate "floor" in the amount of $10 million which expires in May 1999.
The Bank paid a fixed premium of $47 for which it will receive the amount of
interest on $10 million based on the difference of 7% and prime when prime is
less than 7%. This provides some protection to the Bank against decreases in its
net income when the prime rate decreases. Settlement is done quarterly and the
Bank records the impact of this hedge on an accrual basis.
The Bank has executed several transactions during 1995 and 1996 which are
intended to mitigate its exposure to a decline in general market interest rates.
The transactions involved the purchase of three U.S. Government Agency and three
mortgage backed securities for an aggregate cost of $30 million which were
financed through the use of 90 day repurchase agreements. The repurchase
agreements are shown as short-term borrowings on the Company's consolidated
balance sheet. The securities are fixed rate with maturities of $10 million in
May 1998, $7 million in July 1998, $7 million in October 2000, $2 million in
September 2001, $2 million in March 2002 and $1 million in November 2003. The
average yield on the securities was 6.30%. The outstanding repurchase agreements
as of December 31, 1997 had interest rates within a range of 5.68% to 5.75% and
averaged 5.72% and mature within 90 days. As these repurchase agreements expire
they will be renewed at the prevailing rates. These transactions carry risks in
a rising rate environment because of the potential repricing volatility
associated with the short-term repurchase market. If interest rates were to
increase, the cost of borrowings would increase with no offsetting increase in
the yield on the assets purchased. At the same time it is anticipated that the
average yield on variable rate loans would increase and offset this impact.
<PAGE>
<TABLE>
<CAPTION>
The maturities and yields of the investment portfolio at December 31, 1997 are
shown below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES
At December 31, 1997
(dollars in thousands) Maturity
After one year After five years
Carrying Within one year within five years within ten years After ten years
Value Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
<S> <C> <C> <C> <C> <C>
U. S. Treasury $5,041 $1,999 5.84% $3,042 6.21% ---- ---- ---- ----
U. S. Government Agencies 34,327 18,035 6.29 16,292 6.23 ---- ---- ---- ----
Mortgage Backed 5,171 ---- ---- 4,177 6.77 $994 6.71% ---- ----
Mutual funds 3,766 3,766 5.50 ---- ---- ---- ---- ---- ----
- --------------------------------------------------- ---------- ----------- ----------
Total 48,305 23,800 23,511 994 ----
- --------------------------------------------------- ---------- ----------- ----------
Securities held to maturity:
U. S. Treasury 1,992 992 7.05 1,000 6.38 ---- ---- ---- ----
U. S. Government Agencies 5,485 2,000 6.12 3,486 6.42 ---- ---- ---- ----
State and municipal (1) 3,224 732 7.69 1,863 7.55 ---- ---- $628 7.36%
Mortgage Backed 2,518 ---- ---- 2,518 7.90 ---- ---- ---- ----
Other 518 ---- ---- ---- ---- ---- ---- 518 6.00
- --------------------------------------------------- ---------- ----------- ----------
Total 13,737 3,724 8,867 ---- 1,146
- --------------------------------------------------- ---------- ----------- ----------
Total $62,042 $27,524 6.20% $32,378 6.53% $994 6.71% $1,146 6.75%
============================================================================================================================
<FN>
(1) State and municipal securities are adjusted to a fully taxable equivalent
basis using the federal statutory rate.
</FN>
</TABLE>
The following table shows the maturity and interest rate sensitivity of
commercial, real estate construction and real estate-other loans at December 31,
1997. Approximately 85% of the commercial and real estate loan portfolio is
priced with floating interest rates which limits the exposure to interest rate
risk on long-term loans.
<TABLE>
COMMERCIAL AND REAL ESTATE LOAN MATURITY AND INTEREST RATE SENSITIVITY
(dollars in thousands) Balances maturing Interest Rate Sensitivity
- ----------------------------------------------------------------------------------------------------------------------------
Predeter-
Balances at One mined Floating
December 31, One year year to Over interest interest
1997 or less five years five years rates rates
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $92,693 $56,004 $30,087 $6,602 $5,108 $87,585
============================================================================================================================
Real estate construction $17,818 $14,553 $2,275 $990 ----- $17,818
============================================================================================================================
Real estate-other $90,495 $15,164 $25,572 $49,759 $25,009 $65,486
============================================================================================================================
</TABLE>
The above table does not take into account the possibility that a loan may be
renewed at the time of maturity. In most circumstances, the Company treats a
renewal request in substantially the same manner in which it considers the
request for an initial extension of credit. The Company does not have a policy
to automatically renew loans.
<PAGE>
Capital and Liquidity
Capital
The Company's book value per share was $13.30, $12.14 and $11.02 as of December
31, 1997, 1996 and 1995, respectively. Tangible book value per share was $11.80,
$10.40 and $9.06 at December 31, 1997, 1996 and 1995, respectively, adjusted for
goodwill and core deposit intangibles. Shareholders' equity was $33 million, $31
million and $27 million as of December 31, 1997, 1996 and 1995, respectively.
Tangible shareholders' equity was $29 million, $27 million and $22 million as of
December 31, 1997, 1996 and 1995, respectively. See Notes to Consolidated
Financial Statements and "Business - Supervision and Regulation" for a
discussion of the Company's capital requirements.
Liquidity
Management strives to maintain a level of liquidity sufficient to meet customer
requirements for loan funding and deposit withdrawals. Liquidity requirements
are evaluated by taking into consideration factors such as deposit
concentrations, seasonality and maturities, loan demand, capital expenditures,
and prevailing and anticipated economic conditions. SJNB's business is generated
primarily through customer referrals and employee business development efforts.
The Bank utilizes brokered deposits on a limited basis to satisfy temporary
liquidity needs.
The Bank's sources of liquidity consist of its deposits with other banks,
overnight funds sold to correspondent banks and short-term, marketable
investments net of short-term borrowings. On December 31, 1997, consolidated
liquid assets totaled $62 million or 19% of consolidated total assets, as
compared to $61 million or 20% of consolidated total assets on December 31,
1996. In addition to the liquid asset portfolio, SJNB also has available $18
million in informal lines of credit with three major commercial banks,
approximately $6 million of credit available at the Federal Reserve Discount
Window and $14 million in SBA guaranteed loans which are available for sale and
could be sold within a 30-day period. SJNB is primarily a business and
professional bank and, as such, its deposit base is more susceptible to economic
fluctuations. Accordingly, management strives to maintain a balanced position of
liquid assets to volatile and cyclical deposits. In their normal course of
business, commercial clients maintain balances in large certificates of deposit.
The stability of these balances hinges upon, among other factors, market
conditions and each business' seasonality. Large certificates of deposit
amounted to 18% of total deposits on December 31, 1997, as compared to 19% for
1996.
Liquidity is also affected by investment securities and loan maturities and the
effect of interest rate fluctuations on the marketability of both assets and
liabilities. The loan portfolio consists primarily of floating rate, short-term
loans. On December 31, 1997, approximately 45% of total consolidated assets had
maturities under one year and 76% of total consolidated loans had floating rates
tied to the prime rate or similar indexes. The short-term nature of the loan
portfolio, and loan agreements which generally require monthly interest
payments, provide the Company with an additional secondary source of liquidity.
There are no material commitments for capital expenditures in 1998 or beyond.
The Company's liquidity is maintained by cash flows stemming from dividends and
management fees from the Bank and the exercise of stock options issued to the
Bank's employees and directors. The amount of dividends from the Bank is subject
to certain regulatory restrictions as discussed in Note 16 of the Notes to the
Consolidated Financial Statements and elsewhere within this Report. Subject to
said restrictions, at December 31, 1997, up to $11 million could have been paid
to the parent Company by the Bank without regulatory approval. The Company's
financial statements are presented in Note 15 of the Notes to Consolidated
Financial Statements. Dividends of $2.6 million were paid to the parent company
during 1997, while no dividends were paid to the Company by the Bank in 1996 or
1995.
Effects of Inflation
The most direct effect of inflation on the Company is higher interest rates.
Because a significant portion of the Bank's deposits are represented by non
interest-bearing demand accounts, changes in interest rates have a direct impact
on the financial results of the Bank. See "Asset/Liability Management." Another
effect of inflation is the upward pressure on the Company's operating expenses.
Inflation did not have a material effect on the Bank's operations in 1997, 1996
or 1995.
<PAGE>
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company defines interest rate sensitivity as the measurement of the mismatch
in repricing characteristics of assets, liabilities and off balance sheet
instruments at a specified point in time. This mismatch (known as interest rate
sensitivity gap) represents the potential mismatch in the change in the rate of
interest income and interest expense that would result from a change in interest
rates. Mismatches in interest rate repricing among assets and liabilities arise
primarily from the interaction of various customer businesses (i.e., types of
loans versus the types of deposits maintained) and from management's
discretionary investment and funds gathering activities. The Company attempts to
manage its exposure to interest rate sensitivity. However, due to its size and
direct competition from the major banks, the Company must offer products which
are competitive in the market place, even if less than optimum with respect to
its interest rate exposure.
The Company's balance sheet position at December 31, 1997 was asset-sensitive,
based upon the significant amount of variable rate loans and the repricing
characteristics of its deposit accounts. This position provides a hedge against
rising interest rates, but has a detrimental effect during times of interest
rate decreases. Net interest revenues are negatively impacted by a decline in
interest rates. The interest rate gap is a measure of interest rate exposure and
is based upon the known repricing dates of certain assets and liabilities and
assumed repricing dates of others. See "Financial Review - Net Interest Income
and Margin."
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the following table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to reprice, they may react in different degrees to
changes in market interest rates. Additionally, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market interest rates. Further, certain earning assets have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. The Company considers the anticipated effects of these various
factors when implementing its interest rate risk management activities,
including the utilization of certain interest rate hedges.
<TABLE>
Interest Rate Risk Analysis
(dollars in thousands) Average Expected Maturity/Principal Repayment December 31,
----------------------------------------------------------------------------------
Interest Total Fair
Rate 1998 1999 2000 2001 2002 Thereafter Balance Value
- ----------------------------------------------------------------------------------------------------------------------------
Interest-Sensitive Assets:
Fed funds sold and other short-term
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
investments 5.44% $2,700 ---- ---- ---- ---- ---- $2,700 $2,700
Investments:
Fixed maturity 6.18% 23,758 $9,867 $11,127 $678 $4,011 $628 50,069 49,856
Mortgage Backed 6.94% 400 2,471 174 1,278 74 3,292 7,689 8,008
Mutual Funds 5.50% 3,766 ---- ---- ---- ---- ---- 3,766 3,766
Federal Reserve Bank Stock 6.00% ---- ---- ---- ---- ---- 518 518 518
Loans:
Fixed rate 9.73% 9,035 3,005 3,855 2,144 1,463 15,832 35,334 35,765
Variable rate 10.25% 86,153 17,866 17,015 12,078 12,013 43,598 188,723 188,232
Factoring accounts receivable 28.01% 4,915 ---- ---- ---- ---- ---- 4,915 4,926
Interest Rate Floor 7.00% ---- 13 ---- ---- ---- ---- 13 1
- ----------------------------------------------------------------------------------------------------------------------------
Interest-Sensitive Liabilities:
Deposits:
Interest-bearing demand 2.55% 23,974 6,504 6,504 8,673 ---- ---- 45,655 44,121
Money market 3.60% 49,151 15,698 15,698 ---- ---- ---- 80,547 79,489
Savings 2.53% 22 615 615 410 410 ---- 2,072 1,915
Certificates of deposit 5.08% 60,651 1,859 639 161 324 ---- 63,634 63,733
Fed funds purchased and repurchase
agreements 5.72% 16,000 ---- ---- ---- ---- ---- 16,000 16,007
- ---------------------------------------------------------------------------------------------------------------------------
Interest-Sensitive Off-balance sheet
items:
Unused lines of credit and
undisbursed loan commitments 10.37% ---- ---- ---- ---- ---- ---- 92,646 ----
</TABLE>
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following section includes the Company's Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1997
and 1996
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements.
Independent Auditors' Report
The Board of Directors
SJNB Financial Corp.:
We have audited the accompanying consolidated balance sheets of SJNB Financial
Corp. and subsidiary (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SJNB Financial Corp.
and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Jose, California
January 15, 1998
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Balance Sheets
December 31, 1997 and 1996
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Assets 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $22,825 $20,208
Money market investments 2,700 19,800
Investment securities:
Available for sale 48,305 48,044
Held to maturity (Fair value: $13,843 at December 31, 1997
and $15,231 at December 31, 1996) 13,737 15,072
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities 62,042 63,116
- ----------------------------------------------------------------------------------------------------------------------------
Loans 228,972 198,627
Allowance for possible loan losses (4,493) (4,005)
- ----------------------------------------------------------------------------------------------------------------------------
Loans, net 224,479 194,622
- ----------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 3,916 4,001
Other real estate owned ----- 454
Accrued interest receivable and other assets 5,202 2,737
Intangibles, net of accumulated amortization of $1,707 at
December 31,1997 and $1,234 at December 31, 1996. 3,755 4,465
- ----------------------------------------------------------------------------------------------------------------------------
Total $324,919 $309,403
============================================================================================================================
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------------------------------------------
Deposits:
Non interest-bearing $78,437 $80,774
Interest-bearing 191,908 163,865
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 270,345 244,639
- ----------------------------------------------------------------------------------------------------------------------------
Other short-term borrowings 16,000 29,688
Accrued interest payable and other liabilities 5,415 3,871
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 291,760 278,198
- ----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value; 20,000 shares authorized ; 2,493 and 2,571 shares
issued and outstanding
in 1997 and 1996 respectively 18,800 20,880
Retained earnings 14,254 10,263
Net unrealized gain on securities available for sale 105 62
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 33,159 31,205
- ----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies ---- ----
- ----------------------------------------------------------------------------------------------------------------------------
Total $324,919 $309,403
============================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $22,732 $20,422 $18,016
Interest on money market investments 586 258 280
Interest and dividends on investment securities available for sale 2,982 2,907 1,847
Interest on investment securities held to maturity 947 949 878
Other interest and investment income (9) (9) (43)
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 27,238 24,527 20,978
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Interest-bearing demand 1,178 1,155 1,158
Money market and savings 3,061 2,035 1,751
Certificates of deposit of $100 or more 2,964 2,608 2,232
Certificates of deposit of less than $100 792 802 826
Other short-term borrowings 754 1,459 716
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 8,749 8,059 6,683
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 18,489 16,468 14,295
- ----------------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses 705 190 1,045
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 17,784 16,278 13,250
- ----------------------------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposits 607 551 553
Other operating income 453 437 456
Net loss on sale of securities available for sale (47) (142) (43)
- ----------------------------------------------------------------------------------------------------------------------------
Total other income 1,013 846 966
- ----------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 5,725 5,517 4,339
Occupancy 725 702 740
Other 3,460 3,416 3,718
- ----------------------------------------------------------------------------------------------------------------------------
Total other expenses 9,910 9,635 8,797
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,887 7,489 5,419
Income taxes 3,773 3,198 2,395
- ---------------------------------------------------------------------------------------------------------------------------
Net income $5,114 $4,291 $3,024
============================================================================================================================
Basic earnings per share $2.04 $1.73 $1.27
============================================================================================================================
Diluted earnings per share $1.94 $1.64 $1.22
============================================================================================================================
Average common shares outstanding 2,508 2,481 2,381
============================================================================================================================
Average common share equivalents outstanding 2,640 2,622 2,484
============================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gain (Loss) Total
on Securities Share-
Common Retained Available holders'
(in thousands, except per share amounts) Shares Stock Earnings for Sale Equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994 2,363 $19,421 $4,278 $(257) $23,442
- ----------------------------------------------------------------------------------------------------------------------------
Stock options exercised 71 351 ---- ---- 351
Common stock repurchase (16) (145) ---- ---- (145)
Cash dividends ($0.21 per share) ---- ---- (504) ---- (504)
Net income for the year ---- ---- 3,024 ---- 3,024
Net unrealized gain on securities available for sale ---- ---- ---- 490 490
- ----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 2,418 19,627 6,798 233 26,658
- ----------------------------------------------------------------------------------------------------------------------------
Stock options exercised 153 810 ---- ---- 810
Tax benefit from stock options exercised ---- 443 ---- ---- 443
Cash dividends ($0.33 per share) ---- ---- (826) ---- (826)
Net income for the year ---- ---- 4,291 ---- 4,291
Net unrealized loss on securities available for sale ---- ---- ---- (171) (171)
- ----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 2,571 20,880 10,263 62 31,205
- ----------------------------------------------------------------------------------------------------------------------------
Stock options exercised 24 206 ---- ---- 206
Common stock repurchase (102) (2,495) ---- ---- (2,495)
Tax benefit from stock options exercised ---- 209 ---- ---- 209
Cash dividends ($0.45 per share) ---- ---- (1,123) ---- (1,123)
Net income for the year ---- ---- 5,114 ---- 5,114
Net unrealized gain on securities available for sale ---- ---- ---- 43 43
- ----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 2,493 $18,800 $14,254 $105 $33,159
============================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $5,114 $4,291 $3,024
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 705 190 1,045
Depreciation and amortization 529 483 424
Amortization of intangibles 473 499 569
Deferred tax benefit (356) 121 (86)
Loss on sale of securities available for sale 41 142 43
Net (gain) loss on sale of other real estate owned (65) (46) 19
Amortization of (discount) premium on investment securities, net (48) 36 (129)
Decrease (increase) in intangible assets 237 200 (412)
(Increase) decrease in accrued interest receivable and other assets (2,107) (1) 418
Increase (decrease) in accrued interest payable and other liabilities 1,722 (945) 2,470
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,245 4,970 7,385
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale or maturities of securities available for sale 18,610 22,751 14,162
Maturities of securities held to maturity 2,250 5,345 425
Purchase of securities available for sale (18,850) (28,784) (37,148)
Purchase of securities to be held to maturity (857) (5,101) (1,762)
Proceeds from the sale of other real estate owned 519 406 1,761
Net increase in loans (30,562) (27,333) (22,851)
Capital expenditures (444) (989) (896)
Cash used to acquire Astra Financial Corp. ----- (650) -----
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (29,334) (34,355) (46,309)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Net increase in deposits 25,706 47,947 16,405
Other short-term borrowings (13,688) 5,688 24,000
Cash dividends (1,123) (826) (504)
Common stock repurchased (2,495) ----- (145)
Proceeds from stock options exercised 206 810 351
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,606 53,619 40,107
- ----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (14,483) 24,234 1,183
Cash and equivalents at beginning of year 40,008 15,774 14,591
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $25,525 $40,008 $15,774
============================================================================================================================
</TABLE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Other cash flow information:
<S> <C> <C> <C>
Interest paid $8,511 $8,012 $6,388
Income taxes paid $3,445 $4,111 $1,185
============================================================================================================================
Noncash transactions:
Transfer of loans to other real estate owned ----- $150 $950
============================================================================================================================
Purchase of Astra Financial's assets at fair value:
Loans ----- $676 -----
Intangible assets ----- 408 -----
Other assets ----- 93 -----
- ----------------------------------------------------------------------------------------------------------------------------
Fair value of assets acquired ----- 1,177 -----
Liabilities assumed:
Other liabilities ----- 527 -----
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities assumed ----- 527 -----
- ----------------------------------------------------------------------------------------------------------------------------
Cash used to acquire Astra Financial Corp. ----- $650 -----
============================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 1 - Summary of Significant Accounting Policies
SJNB Financial Corp. ("Company") is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The Company was incorporated under
the laws of the State of California on April 18, 1983. Its principal office is
located at One North Market Street, San Jose, California, 95113.
The Company owns 100% of the issued and outstanding common shares of San Jose
National Bank (referred to herein as "SJNB" or "the Bank"). The Bank was
incorporated on November 23, 1981 and commenced business in San Jose, California
on June 10, 1982. Its main office is located at One North Market Street, San
Jose, California. SJNB engages in the general commercial banking business with
special emphasis on the banking needs of the business and professional
communities in San Jose and the surrounding areas. The Financial Services
Division is located at 95 South Market, San Jose, California, where it engages
in the factoring of accounts receivable.
The accounting policies of SJNB Financial Corp. and San Jose National Bank
(collectively, the "Company") are in accordance with generally accepted
accounting principles and conform to general practices within the banking
industry.
a. Consolidation
The consolidated financial statements include the accounts of SJNB. All material
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
b. Investment Securities
The Company accounts for its investment securities as follows:
Available for sale-Investment securities that are acquired without the intent to
hold until maturity are classified as available for sale. Such securities are
valued at market value. Market value adjustments are reported as a separate
component of shareholders' equity until realized.
Held to maturity-Investment securities purchased with the intent and ability to
hold them until maturity are classified as held to maturity. Such securities are
carried at cost, adjusted for accretion of discounts and amortization of
premiums.
Investment securities purchased are recorded as of their trade date. Accretion
of discounts and amortization of premiums arising at acquisition are included in
income using methods approximating the interest method. Gains or losses on sales
of securities, if any, are determined based on the specific identification
method.
c. Loans and Allowance for Possible Loan Losses
Loans generally are stated at the principal amount outstanding. Interest on
loans is credited to income on a simple interest basis. Loan origination fees
and direct origination costs are deferred and amortized to income by a method
approximating the level yield method over the estimated lives of the underlying
loans. The accrual of interest on loans is discontinued and any accrued and
unpaid interest is reversed when, in the opinion of management, there is
significant doubt as to the collectibility of interest or principal or when the
payment of principal or interest is ninety days past due, unless the amount is
well-secured and in the process of collection.
The allowance for possible loan losses is a valuation allowance maintained to
provide for future loan losses through charges to current operating expense. The
allowance is based upon a continuing review of loans by management which
includes consideration of changes in the character of the loan portfolio,
current and anticipated economic conditions, past lending experience and such
other factors which, in management's judgment, deserve recognition in estimating
potential loan losses. In addition, regulatory examiners may require the Company
to recognize additions to the allowance based on their judgments about
information available to them at the time of their examinations.
Impaired loans are those in which, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement, including scheduled interest
payments. The Company measures such loans based on the present value of future
cash flows discounted at the loan's effective interest rate, or at the loan's
market value or the fair value of the collateral if the loan is secured. If the
measurement of the impaired loan is less than the recorded investment in the
loan, impairment is recognized by creating or adjusting an existing allocation
of the allowance for loan losses.
d. Sales of Loans
When loans or participating interests in loans are sold without recourse, gains
and losses are recognized at the time of sale. Gains or losses recognized are
equal to the premium less estimated future servicing costs and profits. Any
premiums or discounts related to loan sales are amortized on a basis that
approximates the effective yield over the estimated remaining life of the loan.
e. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are charged to expense over the
estimated useful lives of the assets on a straight-line basis as follows:
Buildings 30 years
Furniture and equipment 3-10 years
Improvements 7-15 years
f. Other Real Estate Owned
Other real estate owned is comprised of real estate acquired through
foreclosure. Such foreclosures are initially recorded at the lower of cost or
fair value. Subsequent valuation adjustments are made if estimated selling costs
and the fair value falls below the carrying amount. Holding costs are expensed
as incurred.
g. Intangibles
Goodwill is amortized using the straight-line method over 15 years. Core deposit
intangibles are amortized using an accelerated method over ten years.
On a periodic basis, the Company reviews its intangible assets for events or
changes in circumstances that may indicate that the carrying amount of the
assets may not be recoverable. Should such a change indicate that the value of
such intangibles may be impaired, an evaluation of the recoverability would be
performed prior to any writedown of the assets.
h. Interest Rate Instruments
Interest rate instruments are entered into in conjunction with the Bank's
asset/liability management. As these contracts are entered into only after
meeting the accounting criteria for a hedge, and as long as they continue to
meet such criteria, changes in market value are deferred and the net settlements
are accrued as adjustments to interest income. The Bank currently has
outstanding an interest rate floor arrangement which does not meet the
accounting criteria for a hedge and which therefore is accounted for on a mark
to market basis.
i. Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences of differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Under the asset and liability method, deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit
carryforwards, and then a valuation allowance is established to reduce that
deferred tax asset if it is "more likely than not" that the related tax benefits
will not be realized.
j. Net Income Per Share
In December 1997, the Company implemented Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. SFAS No. 128 establishes standards
for computing and reporting earnings per share (EPS) and applies to entities
with publicly held common stock. This statement supersedes Accounting Principles
Board (APB) Opinion No. 15.
Basic net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
net income per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year plus shares
issuable assuming exercise of all employee stock options, except where
anti-dilutive.
k. Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and money market investments.
<PAGE>
l. Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent asset and liabilities to prepare these financial statement in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
m. Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles held and used by an
entity are reviewed for impairment whenever events or changes indicate that the
carrying amount of an asset may not be recoverable. The Company has not
identified any long-lived assets or identifiable intangibles which were
impaired.
n. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under this approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it no
longer controls and liabilities that have been extinguished. The Company did not
have any significant transactions in which this Statement had any impact on its
consolidated financial statements.
o. Reclassification
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.
NOTE 2 - Acquisition
On January 2, 1996 the Company acquired Astra Financial Inc. (Astra) which was
accounted for as a purchase transaction. Astra was an asset-based lending
company based in San Jose, California. Its outstanding factoring receivables
were approximately $2.2 million as of December 31, 1995. The purchase price of
Astra was approximately $760.
NOTE 3 - Cash and Due from Banks
The Federal Reserve requires the Bank to maintain average reserve balances for
certain deposit balances. Such required reserves were approximately $6.0 million
and $4.1 million as of December 31, 1997 and 1996, respectively.
<PAGE>
NOTE 4 - Investment Securities
<TABLE>
<CAPTION>
Investment securities as of December 31, 1997 and 1996 are summarized as
follows:
(dollars in thousands) December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized Fair
----------------------------------------
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale:
<S> <C> <C> <C>
U.S. Treasury $5,001 $40 ----- $5,041
U. S. Government Agencies 34,148 179 ----- 34,327
Mortgage Backed 5,097 74 ----- 5,171
Mutual funds 3,898 ----- ($132) 3,766
- ----------------------------------------------------------------------------------------------------------------------------
Total available for sale 48,144 293 (132) 48,305
- ----------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. Treasury 1,992 16 ----- 2,008
U.S. Government agencies 5,485 34 (7) 5,512
State and municipal (nontaxable) 3,224 36 (2) 3,258
Mortgage Backed 2,518 29 ----- 2,547
- ----------------------------------------------------------------------------------------------------------------------------
Total held to maturity 13,219 115 (9) 13,325
Federal Reserve Bank Stock 518 ----- ----- 518
- ----------------------------------------------------------------------------------------------------------------------------
Total 13,737 115 (9) 13,843
============================================================================================================================
Total investment securities portfolio $61,881 $408 ($141) $62,148
============================================================================================================================
December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized Fair
----------------------------------------
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury $3,989 $19 ($3) $4,005
U. S. Government Agencies 34,099 188 (2) 34,285
Mortgage Backed 5,835 55 (22) 5,868
Mutual funds 4,018 ----- (132) 3,886
- ----------------------------------------------------------------------------------------------------------------------------
Total available for sale 47,941 262 (159) 48,044
- ----------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. Treasury 1,975 28 ----- 2,003
U.S. Government agencies 7,463 78 (18) 7,523
State and municipal (nontaxable) 2,635 20 (2) 2,653
Mortgage Backed 2,481 53 ----- 2,534
- ----------------------------------------------------------------------------------------------------------------------------
Total held to maturity 14,554 179 (20) 14,713
Federal Reserve Bank Stock 518 ----- ----- 518
- ----------------------------------------------------------------------------------------------------------------------------
Total 15,072 179 (20) 15,231
============================================================================================================================
Total investment securities portfolio $63,013 $441 $(179) $63,275
============================================================================================================================
</TABLE>
<PAGE>
As of December 31, 1997 and 1996 investment securities with carrying values of
approximately $39 million and $38 million, respectively, were pledged as
collateral for deposits of public funds and other purposes. Investment in
Federal Reserve Bank stock is carried at cost, which is approximately equal to
its market value.
The following tables provide the scheduled maturities of the Company's
investment securities portfolio as of December 31, 1997:
(dollars in thousands) December 31, 1997
----------------------
Amortized Fair
Securities available for sale Cost Value
-----------------------
Due in one year or less $19,988 $20,034
Due after one year through five
years 23,281 23,511
Due after five years through ten
years 977 994
-----------------------
Total 44,246 44,539
-----------------------
Securities held to maturity
Due in one year or less 3,724 3,729
Due after one year through five 8,867 8,952
years
Due after ten years 628 644
-----------------------
Total 13,219 13,325
-----------------------
Non-maturity investments
Available for sale - Mutual Funds 3,898 3,766
Held to maturity - FRB Stock 518 518
-----------------------
Total 4,416 4,284
-----------------------
Total Investment securities $61,881 $62,148
=======================
Mutual funds consist of several funds invested in U. S. Government securities
and government issued adjustable rate mortgages (ARMS).
<PAGE>
Interest income earned on U. S. Treasury, U. S. Government agencies and state
and municipal securities for the years ended December 31, 1997, 1996 and 1995
are as follows:
- ---------------------------------------------------------
Interest income
(dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------
Securities available for
sale:
U.S. Treasury $280 $291 $417
U.S. Government agencies 2,110 2,088 1,200
Mortgage Backed 373 311 (3)
Mutual funds 219 217 233
Securities held to maturity:
U.S. Treasury 132 168 214
U.S. Government agencies 453 408 306
State and municipal(nontaxable) 141 136 120
Mortgage Backed 190 206 208
Federal Reserve Bank 31 31 30
- ----------------------------------------------------------
Interest income $3,929 $3,856 $2,725
==========================================================
NOTE 5 - Loans
A summary of loans as of December 31, 1997 and 1996 is as follows:
(dollars in thousands) 1997 1996
- -------------------------------------------------------------
Commercial $92,693 $77,335
Real estate construction 17,818 15,451
Real estate-other 90,495 74,713
Consumer 9,042 8,622
Other 19,568 23,174
Unearned fee income (644) (668)
- -------------------------------------------------------------
Total loan portfolio 228,972 198,627
Less allowance for possible loan losses (4,493) (4,005)
- -------------------------------------------------------------
Loans, net $224,479 $194,622
=============================================================
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions. Although
the Company has a diversified loan portfolio, a substantial portion of its
customers' ability to honor contracts is reliant upon the economic stability of
the Santa Clara Valley, which in some degree relies on the stability of high
technology companies in its "Silicon Valley." Loans are generally made on the
basis of a secure repayment source, which is based on a detailed cash flow
analysis; however, collateral is generally a secondary source for loan
qualification.
Approximately 40% of the Company's loan portfolio is made up of real estate
other than construction. This category of real estate loans includes loans on
income-bearing commercial properties. In addition, 7.8% of the loan portfolio is
made up of real estate construction loans. These loans consist of approximately
61% residential and 39% commercial. Included in Consumer loans are Prime equity
loans of $4.9 million or approximately 2.1% of the total loan portfolio.
Included in the category "Other" are loans to real estate developers for
short-term investment purposes and loans to nondevelopers for real estate
investment purposes that amount to approximately 3.8% of the total loan
portfolio. This amounts to approximately 53% of the loan portfolio directly
related to real estate or real estate interests. Approximately 40% of the total
loan portfolio is commercial loans; however, no particular industry represents a
significant portion of such loans.
The following is an analysis of the allowance for possible loan losses for the
years ended December 31, 1997, 1996 and 1995:
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------
Balance, beginning of year $4,005 $3,847 $3,311
Provision for possible loan 705 190 1,045
losses
Charge-offs (288) (418) (696)
Recoveries 71 336 187
Allowance relating to
the acquisition of
Astra Financial Corp. ---- 50 ----
- -----------------------------------------------------------
Balance, end of year $4,493 $4,005 $3,847
===========================================================
<PAGE>
At December 31, 1997, impaired loans totaled $706 with a corresponding valuation
allowance of $66. For the year ended December 31, 1997, the average recorded
investment in impaired loans was approximately $600. The Company recognized $46
of interest on impaired loans (during the portion of the year they were
impaired), of which $39 related to impaired loans for which interest income is
recognized on the cash basis.
The balance of nonaccrual loans as of December 31, 1997 and 1996 was
approximately $360 and $457, respectively. The effect on interest income had
these loans been performing in accordance with contractual terms was $61 in
1997, $35 in 1996 and $111 in 1995. Income actually recognized on these loans
was $32 in 1997, $29 in 1996 and $11 in 1995.
The Company has made loans to executive officers, directors and their affiliates
in the ordinary course of business. An analysis of activity with respect to such
loans during the years ended December 31, 1997, 1996 and 1995 is as follows:
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------
Balance, beginning of year $1,652 $1,466 $3,854
New loans disbursed 495 634 471
Repayments of loans (924) (448) (2,859)
- -----------------------------------------------------------
Balance, end of year $1,223 $1,652 $1,466
===========================================================
As of December 31, 1997, loans of approximately $12 million were pledged as
collateral for the Federal Reserve Discount Window. The Bank did not utilize the
Discount Window for any borrowings during 1997.
NOTE 6 - Premises and Equipment
A summary of premises and equipment as of December 31, 1997 and 1996 is as
follows:
(dollars in thousands) 1997 1996
- -------------------------------------------------------------------
Land $829 $829
Buildings and improvements 3,632 3,880
Furniture and equipment 3,070 2,639
- -------------------------------------------------------------------
Premises and equipment 7,531 7,348
Less accumulated depreciation and amortization (3,615) (3,347)
- -------------------------------------------------------------------
Premises and equipment, net $3,916 $4,001
===================================================================
NOTE 7 - Time Deposits
As of December 31, 1997 and 1996, the Bank had $48 million in time deposits in
denominations of $100 or more. Interest expense for these deposits was $3.0
million and $2.6 million in 1997 and 1996, respectively.
NOTE 8 - Other Short-term Borrowings
Other short-term borrowings include federal funds purchased and securities sold
under agreements to repurchase and information relating to these borrowings are
summarized below:
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------
Federal funds purchased
Balance at December 31, ---- ---- $2,000
Weighted average interest rate
at year end ---- ---- 5.25%
Maximum amount outstanding at
any month end $6,000 $5,000 9,000
Average outstanding balance 834 813 355
Weighted average interest rate
paid 5.93% 5.70% 6.17%
Securities sold under agreements to
repurchase
Balance at December 31, $16,000 $29,688 $22,000
Weighted average interest rate
at year end 5.72% 5.56% 5.77%
Maximum amount outstanding at
any month end 16,000 30,067 23,553
Average outstanding balance 11,236 23,161 10,827
The Company's bank subsidiary has informal arrangements with various
correspondents providing short-term credit for liquidity requirements; such
informal lines aggregated $12 million at December 31, 1997.
<PAGE>
NOTE 9 - Earnings per Share
The reconciliation of the numerators and denominators of the basic and diluted
earnings per share (EPS) computations are as follows:
For the year ended
December 31, 1997
- -----------------------------------------------------------
Net Per share
income Shares amount
- -----------------------------------------------------------
Net income and
basic EPS $5,114 2,508 $2.04
===========
Effect of stock
option dilutive
shares 132
- -----------------------------------------------
Diluted EPS $5,114 2,640 $1.94
===========================================================
For the year ended
December 31, 1996
- --------------------------------------------------------
Per
Net share
income Shares amount
- ----------------------------------------------------------
Net income and
basic EPS $4,291 2,481 $1.73
===========
Effect of stock
option dilutive
shares 141
- ----------------------------------------------
Diluted EPS $4,291 2,622 $1.64
==========================================================
For the year ended
December 31, 1995
- ----------------------------------------------------------
Per
Net share
income Share amount
- ----------------------------------------------------------
Net income and
basic EPS $3,024 2,381 $1.27
===========
Effect of stock
option dilutive
shares 103
- -----------------------------------------------------------
Diluted EPS $3,024 2,484 $1.22
===========================================================
NOTE 10 - Income Taxes
Income tax expense for the years ended December 31, 1997, 1996 and 1995 consists
of the following:
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------
Current:
Federal $3,208 $2,271 $2,108
State 921 806 373
- -----------------------------------------------------------
Total current 4,129 3,077 2,481
- -----------------------------------------------------------
Deferred:
Federal (281) 145 (81)
State (75) (24) (5)
- -----------------------------------------------------------
Total deferred (356) 121 (86)
- -----------------------------------------------------------
Income taxes $3,773 $3,198 $2,395
===========================================================
<PAGE>
Total income tax expense differed from the amount computed by applying the U. S.
federal income tax rates in years ended December 31, 1997, 1996 and 1995 of 34%
to income before income taxes as a result of the following:
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------
Computed "expected " tax
expense $3,021 $2,546 $1,842
California franchise tax, net of
federal income tax 558 516 368
Amortization of intangible assets 142 167 230
Federal tax-exempt investment
income (42) (46) (42)
Other 94 15 (3)
- -----------------------------------------------------------
Income taxes $3,773 $3,198 $2,395
===========================================================
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996, are presented below:
(dollars in thousands) 1997 1996
- -----------------------------------------------------------
Deferred tax assets:
Provision for possible loan losses $1,421 $1,133
Purchase accounting adjustments 181 226
Foreclosure income 43 43
State taxes 297 247
Deferred compensation 112 98
Other 157 63
- -----------------------------------------------------------
Total gross deferred tax assets 2,211 1,810
- -----------------------------------------------------------
Deferred tax liabilities:
Securities available for sale 70 41
Depreciation and amortization 88 43
- -----------------------------------------------------------
Total gross deferred tax liabilites 158 84
- -----------------------------------------------------------
Net deferred tax assets $2,053 $1,726
===========================================================
Amounts for the current year are based upon estimates and assumptions as of the
date of this report and could vary significantly from amounts shown on the tax
returns as filed. Accordingly, the variances from the amounts previously
reported for 1996 are primarily as a result of adjustments to conform to tax
returns as filed.
Deferred tax assets related to purchase accounting adjustments include the tax
effect of fair market value adjustments of the assets and liabilities of
businesses acquired. The Company believes that the net deferred tax asset is
realizable through sufficient taxable income within the carryback periods and
the current year's taxable income.
NOTE 11 - Detail of Other Expense
Other expense for the years ended December 31, 1997, 1996 and 1995 consists of
the following:
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------
Amortization of core deposit
intangibles
and goodwill $473 $499 $569
Data processing 441 554 458
Business promotion 369 365 314
Client services 345 247 247
Legal and professional fees 331 369 476
Directors' fees and costs 226 219 239
Stationery and supplies 183 183 180
Advertising 171 236 186
Regulators' assessments 109 72 283
Loan and collection 104 151 215
Net cost of other real estate owned (72) (48) 45
Other 780 569 506
- ----------------------------------------------------------
Total $3,460 $3,416 $3,718
===========================================================
NOTE 12 - Stock Option Plan
During 1996 the shareholders of the Company approved the 1996 Stock Option Plan
(the "Plan"), which replaced the then existing two stock option plans. The 1996
Stock Option Plan is described below. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for the Plan. Accordingly, no compensation
cost has been recognized for its Plan. Had compensation cost for the Plan been
determined consistent with SFAS No. 123, the Company's net income and earnings
per share would have been adjusted to the pro forma amounts for options granted
for the years 1997, 1996 and 1995 indicated below:
(dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------
Net income:
As reported $5,114 $4,291 $3,024
Pro forma 4,850 4,224 2,947
- ---------------------------------------------------------
Net income per share:
Basic, as reported $2.04 $1.73 $1.27
Basic, pro forma 1.93 1.70 1.24
- ---------------------------------------------------------
Diluted, as reported $1.94 $1.64 $1.22
Diluted, pro forma 1.84 1.61 1.19
- ---------------------------------------------------------
The above amounts include the impact on net income and net income per share for
options granted during the years 1995, 1996 and 1997; such amounts would have
been substantially different if options granted prior to 1995 had been included
in the computation.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the following years:
Assumptions: 1997 1996 1995
- ---------------------------- --------- --------- ----------
Dividend yield 1.3% 1.9% 1.6%
Volatility 53% 50% 55%
Risk free interest rates 6.4% 6.3% 6.5%
Expected lives (years) 6.5 8.2 8.2
<PAGE>
The 1996 Stock Option Plan provides that either incentive stock options or
nonstatutory stock options may be granted to certain key employees or directors
to purchase authorized, but unissued, Common Stock of the Company. Shares may be
purchased at a price not less than the fair market value of such stock on the
date of the grant. All stock options become exercisable 40% one year after the
date of grant and 20% in each of the following three years. They expire no later
than ten years after the date of the grant. The Plan provides that outside
directors will automatically receive a nonstatutory option covering 5,000 shares
annually at an exercise price equal to 100% of the market price of the Common
Stock on the date of grant. The 1996 Stock Option Plan replaced the previous two
plans which had similar provisions. Any options granted under the prior plans
which expire without being exercised, the corresponding common shares shall
become available for awards under the Plan (6,710 shares became available under
this provision). The number of shares subject to outstanding options under these
plans was 153,025 as of December 31, 1997.
Activity under the stock plans is as follows:
Weighted
Number Average
of Exercise
Options Shares Price
- ----------------------------------------------------------
Balances, December 31, 1994 260,471 $5.34
Granted 140,125 9.28
Cancelled (8,300) 8.08
Exercised (70,987) 5.14
- -----------------------------------------------------------
Balances, December 31, 1995 321,309 7.03
- -----------------------------------------------------------
Granted 93,560 16.48
Cancelled (9,640) 11.58
Exercised (152,711) 5.29
- -----------------------------------------------------------
Balances, December 31, 1996 252,518 11.40
Granted 100,070 25.60
Cancelled (15,075) 15.70
Exercised (23,553) 8.76
- -----------------------------------------------------------
Balances, December 31, 1997 313,960 $15.92
===========================================================
The weighted-average fair value of options granted during 1997, 1996 and 1995
was $13.28, $6.22 and $4.32 respectively.
The following table summarizes options outstanding and exercisable at December
31, 1997:
- --------------------------------------------------------------------------------
Range of Weighted Average Weighted
----------------------------- Average
Exercise Shares Contractual Exercise Shares Exercise
Price Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------
$4.25-9.13 28,800 5.75 $6.88 25,400 $6.73
11.50-11.50 110,120 7.56 9.35 64,960 9.35
13.38-14.31 8,975 8.13 13.64 2,325 13.56
16.38-16.38 53,000 8.42 16.38 20,000 16.38
16.75-23.88 31,765 8.88 19.50 6,994 18.87
24.00-24.88 11,800 9.31 24.33 ---- ----
25.00-25.00 57,000 9.17 25.00 7,000 25.00
25.38-39.81 12,500 9.81 35.89 ---- ----
- --------------------------------------------------------------------------------
$4.25-39.81 313,960 8.14 $15.92 126,679 $11.51
======= =======
NOTE 13 - Commitments and Contingent Liabilities
In the normal course of business, there are outstanding commitments, such as
commitments to extend credit, which are not reflected in the consolidated
financial statements. These commitments involve, to varying degrees, credit risk
in excess of the amount recognized as either an asset or liability in the
consolidated balance sheet. The Company controls the credit risk through its
credit approval process. The same credit policies are used when entering into
such commitments. Management does not anticipate any loss from such commitments.
As of December 31, 1997, amounts committed to extend credit under normal lending
agreements aggregated approximately $93 million for undisbursed loan commitments
and approximately $12 million for commitments under unused standby letters of
credit and other guarantees.
The Bank utilizes various financial instruments with off-balance sheet risk to
reduce its exposure to fluctuations in interest rates. These financial
instruments involve, to varying degrees, credit and interest rate risk in excess
of the amount recognized as either an asset or liability in the statement of
financial position.
The credit risk is the possibility that a loss may occur because a party to a
transaction fails to perform according to the terms of the contract. Interest
rate risk is the possibility that future changes in market prices will cause a
financial instrument to be less valuable or more onerous. The Bank attempts to
control the credit risk arising from these instruments through its credit
approval process and through the use of risk control limits and monitoring
procedures. Interest rate risk is managed by various asset and liability methods
including the utilization of interest rate hedging vehicles.
Also at December 31, 1997, the Bank had outstanding an interest rate floor in
the amount of $10 million for a remaining period of approximately 16 months. The
Bank has paid a fixed premium for which it will receive, through May 10, 1999,
the amount of interest on $10 million based on the difference of 7% and Prime
when Prime is less than 7%. This will protect the Bank against decreases in its
net income when Prime decreases to less than 7%. The current fair market value
of the floor is approximately $1.
The Company is obligated under its lease agreement for 95 South Market Street
under a noncancelable operating lease through September 2004. The lease is
subject to periodic adjustment based on changes in the CPI. The following table
shows future minimum payments under the lease as of December 31, 1997:
- ------------------------------------------------------------
Years Ending December 31,(in thousands)
- ------------------------------------------------------------
1998-2002 ($236 each year) $1,180
Thereafter 413
- ------------------------------------------------------------
Total minimum lease payments $1,593
============================================================
Total minimum lease payments to be received under noncancelable operating
subleases at December 31, 1997 are approximately $1.3 million; these payments
are not reflected in the above table.
There is ordinary routine litigation incidental to the business pending against
the Company but, in the opinion of management, liabilities (if any) arising from
such claims will not have a material effect upon the consolidated financial
statements of the Company.
NOTE 14 - Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the Company disclosure of estimated fair values for its financial instruments.
Fair value estimates, methods and assumptions, set forth below for the Company's
financial instruments, are made solely to comply with the requirements of SFAS
No. 107 and should be read in conjunction with the consolidated financial
statements and notes thereto in this Annual Report.
Fair values are based on estimates or calculations at the transaction level
using present value techniques in instances where quoted market prices are not
available. Because broadly traded markets do not exist for most of the Company's
financial instruments, the fair value calculations attempt to incorporate the
effect of current market conditions at a specific time. Fair valuations are
management's estimates of the values, and they are often calculated based on
current pricing policy, the economic and competitive environment, the
characteristics of the financial instruments, and other such factors. These
calculations are subjective in nature, involve uncertainties and matters of
significant judgment and do not include tax ramifications; therefore, the
results cannot be determined with precision, substantiated by comparison to
independent markets and may not be realized in an actual sale or immediate
settlement of the instruments. The fair valuations have not been updated since
year end; therefore, the valuations may have changed significantly since that
point in time.
The Company has not included certain material items in its disclosure, such as
the value of the long-term relationships with the Company's deposit customers,
since these intangibles are not financial instruments. There may be inherent
weaknesses in any calculation technique, and changes in the underlying
assumptions used, including discount rates and estimates of future cash flows,
could significantly affect the results. For all these reasons, the aggregation
of the fair value calculations presented herein do not represent, and should not
be construed to represent, the underlying value of the Company.
The following table presents a summary of the Company's financial instruments,
as defined by SFAS No. 107 as of December 31, 1997 and 1996:
<PAGE>
<TABLE>
(dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Financial assets Value Value Value Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $22,825 $22,825 $20,208 $20,208
Money market investments 2,700 2,700 19,800 19,807
Investment securities 62,042 62,148 63,116 63,275
Loans, net 224,479 224,430 194,622 193,438
Accrued interest receivable 1,838 1,838 1,735 1,735
Financial liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Deposits 270,345 270,444 245,213 245,348
Federal funds purchased, securities sold under
repurchase agreements and other borrowings 16,576 16,583 30,286 30,318
Off-balance sheet Financial Instruments
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate floor contract purchased 13 1 22 8
</TABLE>
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, not previously discussed above, are described
below:
Financial instruments with fair value approximate to carrying value - The
carrying value of cash and due from banks, money market investments, accrued
interest receivable, noninterest-bearing demand accounts, interest-bearing
checking, money market and savings deposit accounts, accrued interest receivable
and expense approximates fair value due to the short-term nature of these
financial instruments.
Investment securities - The estimated fair values of securities by type are
based on quoted market prices when available.
Loans - The carrying amount of loans is net of unearned fee income and the
reserve for possible loan losses. The fair valuation calculation process
differentiates loans based on their financial characteristics, such as product
classification, loan category, pricing features and remaining maturity.
Prepayment estimates are evaluated by product and loan rate. Discount rates
presented in the paragraphs below have a wide range due to the Company's mix of
fixed and variable rate products.
The fair value of loans is calculated by discounting contractual cash flows
using discount rates that reflect the Company's current pricing for loans with
similar characteristics and remaining maturity. Most of the discount rates
applied to these loans were between 10.6% and 11.2% at December 31, 1997.
Additionally, the allowance for loan losses was applied against the estimated
fair value of loans to recognize future defaults of contractual cash flows.
Fair value for nonperforming loans is based on discounting estimated cash flows
using a rate commensurate with the risk associated with the estimated cash
flows, or underlying collateral values, where appropriate.
Deposits - The fair value of certificates of deposit and other time deposits is
calculated based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for like deposits with
similar remaining maturities.
Other short-term borrowings - A reasonable estimate of the fair value of federal
funds sold is the carrying amount because of the relatively short period of time
between the origination of the instrument and its expected maturity.
The fair value of the Company's securities sold under repurchase agreements is
calculated based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for such instruments with
similar remaining maturities.
Commitment to extend credit - The majority of the Company's commitments to
extend credit carry variable and current market interest rates if converted to
loans. Because these commitments are generally unassignable by either the
Company or the borrower, they only have value to the Company and the borrower.
The estimated fair value approximates the recorded deferred fee amounts and is
excluded from the table.
Derivative financial instruments - The fair value of the interest rate floor
generally reflects the estimated amounts the Company would receive based upon
dealer quotes, to terminate such agreements at the reporting date.
<PAGE>
<TABLE>
<CAPTION>
NOTE 15 - SJNB Financial Corp.
(Parent Company Only)
The following are the financial statements of SJNB Financial Corp. (parent company only):
- ----------------------------------------------------------------------------------------------------------------------------
Balance Sheets
December 31, 1997 and 1996
(dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and equivalents $176 $1,050
Investment in the Bank 32,662 30,061
Other assets 321 94
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $33,159 $31,205
============================================================================================================================
Liabilities and Shareholders' Equity
Total liabilities ----- -----
- ----------------------------------------------------------------------------------------------------------------------------
Common stock, no par value; authorized, 20,000 shares
issued and outstanding, 2,493 shares
in 1997 and 2,571 shares in 1996 $18,800 $20,880
Retained earnings 14,254 10,263
Net unrealized gain on securities available for sale 105 62
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 33,159 31,205
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $33,159 $31,205
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Statements of Income
Years Ended December 31, 1997, 1996 and 1995
(dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Equity in undistributed income of the Bank $2,557 $4,343 $3,010
Reduction of provision for possible loan losses ----- ----- $57
Cash dividend received from Bank 2,600 ----- -----
Interest income and fees on loans 13 23 123
Other expense (84) (110) (156)
- ----------------------------------------------------------------------------------------------------------------------------
Income before taxes 5,086 4,256 3,034
Income tax benefit (expense) 28 35 (10)
- ----------------------------------------------------------------------------------------------------------------------------
Net income $5,114 $4,291 $3,024
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
(dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $5,114 $4,291 $3,024
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Recovery of provision for possible loan losses ---- ---- (57)
(Increase) decrease in other assets (19) 423 ----
(Decrease) increase in liabilities ---- (15) 10
Equity in undistributed income of the Bank (5,157) (4,343) (3,010)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (62) 356 (33)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease in loans, net ---- ---- 512
Cash dividend received from Bank 2,600 ---- ----
Cash dividend (1,123) (826) (504)
Common stock repurchased (2,495) ---- (145)
Stock options exercised 206 810 351
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (812) (16) 214
- ----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (874) 340 181
Cash and equivalents at beginning of year 1,050 710 529
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $176 $1,050 $710
============================================================================================================================
</TABLE>
<PAGE>
NOTE 16- Regulatory Matters
The Federal Reserve Board, the Comptroller of the Currency and the FDIC have
issued substantially similar risk-based and leverage capital guidelines
applicable to United States banking organizations. In addition, those regulatory
agencies may from time to time require that a banking organization maintain
capital above the minimum levels, whether because of its financial condition or
actual or anticipated growth.
The Federal Reserve Board risk-based guidelines define a two-tier capital
framework. Tier 1 capital consists of common and qualifying preferred
shareholders' equity, less certain intangibles and other adjustments. Tier 2
capital consists of subordinated and other qualifying debt, and the allowance
for possible loan losses up to 1.25% of risk weighted assets. The total of Tier
1 and Tier 2 capital, less investments in unconsolidated subsidiaries,
represents qualifying total capital, at least 50% of which must consist of Tier
1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total
capital by risk-weighted assets. Assets and off-balance sheet exposures are
assigned to one of four categories of risk-weights, based primarily on relative
credit risk. The minimum tier 1 risk-based capital ratio is 4% and the minimum
total risk-based capital ratio is 8%. The leverage capital ratio is determined
by dividing Tier 1 capital by adjusted average total assets. Although the stated
minimum leverage capital ratio is 3%, most banking organizations are required to
maintain leveraged capital ratios of at least 100 to 200 basis points above the
3%.
The table below summarizes the Tier 1 and total risk-based capital ratios and
leverage capital ratios of the Company and the Bank as of the dates indicated:
<TABLE>
Risk-based and Leverage Capital Ratios
(dollars in thousands)
December 31, 1997 December 31, 1996
----------------------------------------------------------------------
Company - Risk-based Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital $29,167 11.28% $26,533 11.91%
Tier 1 capital minimum requirement 10,344 4.00 8,910 4.00
----------------------------------------------------------------------
Excess $18,823 7.28% $17,623 7.91%
======================================================================
Total capital $32,415 12.53% $29,333 13.17%
Total capital minimum requirement 20,689 8.00 17,820 8.00
----------------------------------------------------------------------
Excess $11,726 4.53% $11,513 5.17%
======================================================================
Risk-adjusted assets $258,608 $222,744
Company - Leverage
- ----------------------------------------------------------------------------------------------------------------------------
Tier 1 capital $29,167 9.07% $26,533 9.28%
Minimum leverage ratio requirement 12,870 4.00 11,438 4.00
----------------------------------------------------------------------
Excess $16,297 5.07% $15,095 5.28%
======================================================================
Average total assets $321,747 $285,952
Bank - Risk-based
- ----------------------------------------------------------------------------------------------------------------------------
Tier 1 capital $28,879 11.17% $25,389 11.40%
Tier 1 capital minimum requirement 10,341 4.00 8,907 4.00
----------------------------------------------------------------------
Excess $18,538 7.17% $16,482 7.40%
----------------------------------------------------------------------
Total capital $32,126 12.43% $28,187 12.66%
Total capital minimum requirement 20,683 8.00 17,813 8.00
----------------------------------------------------------------------
Excess $11,443 4.43% $10,374 4.66%
======================================================================
Risk-adjusted assets $258,533 $222,668
Bank - Leverage
- ----------------------------------------------------------------------------------------------------------------------------
Tier 1 capital $28,879 8.97% $25,389 8.87%
Minimum leverage ratio requirement 12,881 4.00 11,447 4.00
----------------------------------------------------------------------
Excess $15,998 4.97% $13,942 4.87%
----------------------------------------------------------------------
Average total assets $322,014 $286,164
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
among other things, identifies five capital categories for insured depository
institutions, (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires the
respective Federal regulatory agencies to implement systems for "prompt
corrective action" for insured depository institutions that do not meet minimum
capital requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to meet
the capital guidelines could also subject a banking institution to capital
raising requirements. An "undercapitalized" bank must develop a capital
restoration plan and its parent holding company must guarantee the bank's
compliance with the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of 5% of the bank's assets at the time
it became "undercapitalized" or the amount needed to comply with the plan.
Furthermore, in the event of the bankruptcy of the parent holding company, such
guarantee would take priority over the parent's general unsecured creditors.
The various regulatory agencies have adopted substantially similar regulations
that define the five capital categories identified by FDICIA, using the total
risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the
relevant capital measures. Such regulations establish various degrees of
corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, or 3% in some cases. Under these guidelines, the
Company and the Bank were considered well capitalized at December 31, 1997 and
1996.
Banking agencies have recently adopted final regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation will be made as part of the institution's regular safety and
soundness examination. Banking agencies also have recently adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in evaluation
of a bank's capital adequacy. Concurrently, banking agencies have proposed a
methodology for evaluating interest rate risk. After gaining experience with the
proposed measurement process, those banking agencies intend to propose further
regulations to establish an explicit risk-based capital charge for interest rate
risk.
The ability of the Company to pay dividends largely depends upon the dividends
paid to it by the Bank. There are legal limitations on the ability of the Bank
to provide funds to the Company in the form of loans, advances or dividends.
Under national banking law, without the prior approval of the Comptroller of the
Currency, the Bank may not declare dividends in any calendar year that exceed
the Bank's net profits for that year, as defined by statute, combined with its
net retained profits, as defined, for the preceding two years. As of December
31, 1997, the Bank may initiate dividend payments without prior regulatory
approval of up to $11.1 million.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors, executive officers, promoters and control
persons and compliance with Section 16(a) of the Exchange Act is incorporated by
reference to the text under the captions "Election of Directors," "Executive
Compensation and Transactions with Directors and Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement
for its 1997 Annual Meeting of Shareholders.
ITEM 11: EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference to
the text under the caption "Executive Compensation and Transactions with
Directors and Officers" in the Registrant's Proxy Statement for its 1997 Annual
Meeting of Shareholders.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference to the text under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy
Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated by reference to the text under the caption "Executive Compensation
and Transactions with Directors and Officers" of the Registrant's Proxy
Statement for its 1997 Annual Meeting of Shareholders
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. All Financial Statements
See Index to Financial Statements on page 31 hereof.
(a) 2. Financial statements schedules required. None. (Information included
in Financial Statements).
(a) 3. Exhibits
The following exhibits are filed as part of this report:
Exhibit Number
(2)a. The Plan of Acquisition and Merger by and between SJNB Financial Corp.
and Business Bancorp (as amended) is hereby incorporated by reference
to Annex A filed with Registration Statement on Form S-4, Amendment
No. 2 Commission File No. 33-79874, filed with the Securities and
Exchange Commission on August 3, 1994.
2)b. The Stock Acquisition Agreement by and among San Jose National Bank,
Astra Financial Inc. and Thomas D. Griffin, dated November 17, 1995,
and related side letters dated December 14, 1995 and January 5, 1996
are hereby incorporated by reference to Exhibit (2) b. of the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995.
3(i). The Registrant's restated Articles of Incorporation are hereby
incorporated by reference to Exhibit (3) b. of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988.
(3)(ii). The Registrant's restated bylaws as o f February 28, 1996 are hereby
incorporated by reference to Exhibit (3) b. of the Registrant's
Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 1996.
*(10)a. The Registrant's Stock Option Plan including Amendments No. 1 and 2
is hereby incorporated by reference from Exhibit 4.1 of the
Registrant's Registration Statement on Form S-8, as filed on October
4, 1989 and amended January 24, 1992 under Registration No. 33-31392.
*(10)b. The form of Incentive Stock Option Agreement being utilized
under the Stock Option Plan is hereby incorporated by reference from
Exhibit 4.2 of Amendment No. 1 to the Registrant's Registration
Statement on Form S-8, as filed on January 24, 1992, under
Registration No. 33-31392.
*(10)c. The form of Stock Option Agreement being utilized under the Stock
Option Plan is hereby incorporated by reference from Exhibit 4.3 of
Amendment No. 1 to the Registrant's Registration Statement on Form
S-8, as filed on January 24, 1992, under Registration No. 33-31392.
*(10)d. Amendment No. 3 to the Stock Option Plan is hereby incorporated by
reference from Exhibit 4.4 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-8, as filed on January 24, 1992,
under Registration No. 33-31392.
*(10)e. Amendment No. 4 to the Stock Option Plan is hereby incorporated by
reference from Exhibit 4.5 of Amendment No. 2 to the Registrant's
Registration Statement on Form S-8, as filed on June 22, 1992, under
Registration No. 33-31392.
*(10)f. The Registrant's 1992 Employee Stock Option Plan is hereby
incorporated by reference from Exhibit 4.1 of the Registrant's
Registration Statement on Form S-8, as filed on September 4, 1992,
under Registration No. 33-51740.
*(10)g. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby
incorporated by reference to Exhibit (10) f. of the Registrant's
Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 1995.
*(10)h. The form of Incentive Stock Option Agreement being utilized under
the 1992 Employee Stock Option Plan is hereby incorporated by
reference from Exhibit 4.2 of the Registrant's Registration Statement
on Form S-8, as filed on September 4, 1992, under Registration No.
33-51740.
*(10)i. The form of Stock Option Agreement being utilized under the 1992
Employee Stock Option Plan is hereby incorporated by reference from
Exhibit 4.3 of the Registrant's Registration Statement on Form S-8, as
filed on September 4, 1992, under Registration No. 33-51740.
*(10)j. The Registrant's 1992 Director Stock Option Plan is hereby
incorporated by reference from Exhibit (10) i. of the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1992.
*(10)k. Amendment No. 1 to the 1992 Director Stock Option Plan is hereby
incorporated by reference to Exhibit (10) i. of the Registrant's
Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 1995.
*(10)l. The form of Stock Option Agreement being utilized under the 1992
Director Stock Option Plan is hereby incorporated by reference from
Exhibit (10) j. of the Registrant's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1992.
*(10)m. The Registrant's 1996 Stock Option Plan is incorporated by
reference to exhibit 99.1 of the Registrant's Form S-8 filed July 30,
1996.
*(10)n. Agreement between James R. Kenny and SJNB Financial Corp. and San
Jose National Bank dated March 27, 1996 is hereby incorporated by
reference to Exhibit (10) m. of the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 1996.
*(10)o. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and
San Jose National Bank dated March 27, 1996 is hereby incorporated by
reference to Exhibit (10) n. of the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 1996.
(10)p. Systems Management Services Agreement by and between Systematics, Inc.
and San Jose National Bank dated March 1, 1990, and amendments
dated April 5, 1990, July 10, 1990 and January 27, 1992 are hereby
incorporated by reference from Exhibit (10) g. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
(10)q. Agreement for Item Processing Services by and between Datatronix
Financial Services and San Jose National Bank dated April 13, 1992 is
hereby incorporated by reference from Exhibit (10) m. of the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992.
(10)r. Sublease dated April 5, 1982, for premises at 95 South Market
Street, San Jose, CA is hereby incorporated by reference to Exhibit
(10) n. of the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994.
(10)s. Sublease by and between McWhorter's Stationary and San Jose
National Bank, dated July 6, 1995, and as amended August 11, 1995 and
September 21, 1995, for premises at 95 South Market Street, San Jose
CA is hereby incorporated by reference to Exhibit (10) o. of the
Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 1995.
(10)t. Sublease by and between Greater Unified Management Businesses, Inc.
(d.b.a. as Logistics) and SJNB Financial Corp., dated January 15,
1996, and as amended March 19, 1996, for premises at 95 South Market
Street, San Jose CA is hereby incorporated by reference to Exhibit
(10) s. of the Registrant's Quarterly Form 10-QSB for the quarterly
period ended March 31, 1996.
(22) Subsidiary of Registrant.
(23) Consent of KPMG Peat Marwick LLP.
(27) Financial Data Schedule.
* Indicates management contract or compensation plan or arrangement.
(b) Reports on Form 8-K
None.
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: March 6, 1998 SJNB Financial Corp.
By: S/J.R. Kenny By: S/E.E. Blakeslee
James R. Kenny Eugene E. Blakeslee
President and Chief Executive Vice President &
Executive Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
S/J.R. Kenny
James R. Kenny
President, Chief Executive Officer
and Director
March 6, 1998
S/E.E. Blakeslee
Eugene E. Blakeslee
Executive Vice President and
Chief Financial Officer and
Chief Accounting Officer
March 6, 1998
S/R.S. Akamine
Ray S. Akamine, Director
March 6, 1998
S/R.A. Archer
Robert A. Archer
Chairman and Director
March 6, 1998
S/A.B. Bruno
Albert V. Bruno, Director
March 6, 1998
S/R. Diridon
Rod Diridon, Director
March 6, 1998
S/F.J. Gorry
F. Jack Gorry, Director
March 6, 1998
S/A.K. Lund
Arthur K. Lund, Director
March 6, 1998
S/L. Oneal
Louis Oneal, Director
March 6, 1998
S/D. Rubino
Diane Rubino, Director
March 6, 1998
S/D.L. Shen
Douglas L. Shen, Director
March 6, 1998
S/G.S. Vandeweghe
Gary S. Vandeweghe, Director
March 6, 1998
<PAGE>
SJNB Financial Corp.
Form 10-K
Exhibits
December 31, 1997
The following exhibits are filed as part of this report:
(2)a. The Plan of Acquisition and Merger by and between SJNB Financial
Corp. and Business Bancorp (as amended) is hereby incorporated by
reference to Annex A filed with Registration Statement on Form S-4,
Amendment No. 2 Commission File No. 33-79874, filed with the
Securities and Exchange Commission on August 3, 1994.
(2)b. The Stock Acquisition Agreement by and among San Jose National
Bank, Astra Financial Inc. and Thomas D. Griffin, dated November 17,
1995, and related side letters dated December 14, 1995 and January
5, 1996 are hereby incorporated by reference to Exhibit (2) b. of
the Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995.
(3)(i). The Registrant's restated Articles of Incorporation are hereby
incorporated by reference to Exhibit (3) b. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988.
(3)(ii). The Registrant's restated bylaws as of February 28, 1996 are hereby
incorporated by reference to Exhibit (3)b. of the Registrant's
Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 1996.
*(10) a. The Registrant's Stock Option Plan including Amendments No. 1 and 2
is hereby incorporated by reference from Exhibit 4.1 of the
Registrant's Registration Statement on Form S-8, as filed on October
4, 1989 and amended January 24, 1992 under Registration No.33-31392.
*(10)b. The form of Incentive Stock Option Agreement being utilized under
the Stock Option Plan is hereby incorporated by reference from
Exhibit 4.2 of Amendment No. 1 to the Registrant's Registration
Statement on Form S-8, as filed on January 24, 1992, under
Registration No.
33-31392.
*(10)c. The form of Stock Option Agreement being utilized under the Stock
Option Plan is hereby incorporated by reference from Exhibit 4.3 of
Amendment No. 1 to the Registrant's Registration Statement on Form
S-8, as filed on January 24, 1992, under Registration No.
33-31392.
*(10) d. Amendment No.3 to the Stock Option Plan is hereby incorporated by
reference from Exhibit 4.4 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-8, as filed on January 24, 1992,
under Registration No. 33-31392.
*(10) e. Amendment No. 4 to the Stock Option Plan is hereby incorporated by
reference from Exhibit 4.5 of Amendment No. 2 to the Registrant's
Registration Statement on Form S-8, as filed on June 22, 1992, under
Registration No. 33-31392.
*(10) f. The Registrant's 1992 Employee Stock Option Plan is hereby
incorporated by reference from Exhibit 4.1 of the Registrant's
Registration Statement on Form S-8, as filed on September 4, 1992,
under Registration No. 33-51740.
*(10) g. Amendment No. 1 to the 1992 Employee Stock O ption Plan is hereby
incorporated by reference to Exhibit (10) f. of the Registrant's
Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 1995.
*(10) h. The form of Incentive Stock Option Agreement being utilized under
the 1992 Employee Stock Option Plan is hereby incorporated by
reference from Exhibit 4.2 of the Registrant's Registration
Statement on Form S-8, as filed on September 4, 1992, under
Registration No.
33-51740.
*(10)i. The form of Stock Option Agreement being utilized under the 1992
Employee Stock Option Plan is hereby incorporated by reference from
Exhibit 4.3 of the Registrant's Registration Statement on Form S-8,
as filed on September 4, 1992, under Registration No. 33-51740.
*(10)j. The Registrant's 1992 Director Stock Option Plan is hereby
incorporated by reference from Exhibit (10) i. of the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1992.
*(10) k. Amendment No. 1 to the 1992 Director Stock Option Plan is hereby
incorporated by reference to Exhibit (10) i. of the Registrant's
Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 1995.
*(10)l. The form of Stock Option Agreement being utilized under the 1992
Director Stock Option Plan is hereby incorporated by reference from
Exhibit (10) j. of the Registrant's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1992.
*(10)m. The Registrant's 1996 Stock Option Plan is incorporated by
reference to exhibit 99.1 of the Registrant's Form S-8 filed July
30, 1996.
*(10) n. Agreement between James R. Kenny and SJNB Financial Corp. and San
Jose National Bank dated March 27, 1996 is hereby incorporated by
reference to Exhibit (10) m. of the Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended March 31, 1996.
*(10) o. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and
San Jose National Bank dated March 27, 1996 is hereby incorporated
by reference to Exhibit (10) n. of the Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended March 31, 1996.
(10)p. Systems Management Services Agreement by and between Systematics,
Inc. and San Jose National Bank dated March 1, 1990, and amendments
dated April 5, 1990, July 10, 1990 and January 27, 1992 are hereby
incorporated by reference from Exhibit (10) g. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
(10)q. Agreement for Item Processing Services by and between Datatronix
Financial Services and San Jose National Bank dated April 13, 1992
is hereby incorporated by reference from Exhibit (10) m. of the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992.
(10)r. Sublease dated April 5, 1982, for premises at 95 South Market
Street, San Jose, CA is hereby incorporated by reference to Exhibit
(10) n. of the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994.
(10)s. Sublease by and between McWhorter's Stationary and San Jose
National Bank, dated July 6, 1995, and as amended August 11, 1995
and September 21, 1995, for premises at 95 South Market Street, San
Jose CA is hereby incorporated by reference to Exhibit (10) o. of
the Registrant's Quarterly Report on Form 10-QSB for the quarterly
period ended September 30, 1995.
(10)t. Sublease by and between Greater Unified Management Businesses,
Inc. (d.b.a. as Logistics) and SJNB Financial Corp., dated January
15, 1996, and as amended March 19, 1996, for premises at 95 South
Market Street, San Jose CA is hereby incorporated by reference to
Exhibit (10) s. of the Registrant's Quarterly Form 10-QSB for the
quarterly period ended March 31, 1996.
(22) Subsidiary of Registrant.
(23) Consent of KPMG Peat Marwick LLP.
(27) Financial Data Schedule.
* Indicates management contract or compensation plan or arrangement.
The Board of Directors
SJNB Financial Corp.:
We consent to incorporation by reference in the registration statement (No.
33-31392) on Form S-8 of SJNB Financial Corp. of our report dated July 15,
1998, relating to the consolidated balance sheets of SJNB Financial Corp.
and subsidiary as of December 31, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997, which
report appears in the December 31, 1997 annual report on Form 10-K of SJNB
Financial Corp.
s/KPMG Peat Marwick
San Jose, CA
March 6, 1998
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<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
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